Outlook is good for U.S., turmoil in Asia Hopkins economist expects Asia's woes to spoil U.S. party

Hanke notes global impact

December 04, 1997|By Jay Hancock | Jay Hancock,SUN STAFF

Unchastened by analysts who downplay economic damage in the Pacific Basin, one of America's most prominent Asia pessimists predicted "nothing but trouble" for the region yesterday and warned that the resulting trauma for U.S. businesses has barely begun.

Recent Asian bank collapses, currency devaluations and other wounds are far more significant to the world economy than similar pain in Latin America two years ago, said Steve Hanke, an international monetary adviser and professor of applied economics at the Johns Hopkins University.

"This is a big thing; this is one of the big events of the last 25 years that's going on there," Hanke told a seminar sponsored by the World Trade Center Institute of Baltimore.

As a result, he added, "the bull market is coming to an end" in U.S. stocks. "There is no question about it."

Latin America accounts for only about 4 percent of world trade, Hanke said. By contrast, Asia accounts for 25 percent of global exports, and that doesn't include India, which is also starting to have problems.

After a 10-year capital investment binge, Pacific countries have too many factories now, and their currencies have fallen against the dollar by as much as 40 percent since May.

Their banks are folding or retrenching, their interest rates are well into double digits, and their consumers have stopped spending.

The result, Hanke said, is a double blow

for the United States. Not only will faltering economies cause Asian countries to sharply cut purchases of U.S. goods, but those nations will also seek to export their way out of trouble by shipping cheap goods here.

"They have in effect put discounts on what they can export," Hanke said.

"We're going to have fierce competition. This will put a cap on the pricing power of most U.S. corporations. We're coming down from earnings growth of double digits to single digits," and single-digit profit growth, he said, won't support current U.S. stock prices.

While nobody disputes that Asian problems will hurt the U.S. economy to a degree, many analysts and investors don't share Hanke's pessimism. Most American products these days, they argue, are not goods but services, which are more insulated against international pricing pressure.

And only half of the country's manufacturers compete worldwide against overseas companies anyway, according to the McKinsey Global Institute in Washington.

But Hanke -- who writes a column for Forbes magazine, is president of the Toronto Trust-Argentina mutual fund and has advised monetary authorities on several continents -- warns against looking at the situation with blinders.

"You also have to look at what's going on in the rest of the world," he said in an interview. "It fans out into all the tentacles of international trade, which has been increasing rather rapidly in the last decade."

Europe, for example, sends 30 percent of its exports to Asia. If Asian problems hurt European businesses, U.S. exports to Europe will suffer, he said. "Most of Europe's growth, certainly in the last five years, has in large part been motivated by pretty strong export growth."

Hanke is not optimistic about the effort by the International Monetary Fund to bail out Asian economies, and he even thinks it could backfire politically, causing nations to resent outside authority, to look inward, erect trade barriers and hurt global growth.

Problems in many Asian nations, including Japan, go far beyond the money-supply problems the IMF is used to dealing with, he said.

Asian banks and corporations are riddled with bad debt and opaque accounting, he said, and that will be harder to solve.

"You don't know what is going on in the accounts, even if the books are audited by an international accounting firm," he said. "The insolvencies are just going to bubble up."

Don't expect U.S. stock markets to digest all this news in one day, he said.

"What will happen will not be these sharp falls, but just a gnawing away as [disappointing] earnings reports come out. The bullishness will just gradually come out of the market."

Pub Date: 12/04/97

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