The up market syndrome

May 12, 1998|By William Pfaff

PARIS -- A friend said to me the other day that the word "crash" no longer is part of the American vocabulary. We only know stock market "correction," and corrections have just to be waited out.

He explained that the stock market only goes up because immense popular and political interests, as well as corporate interests, are today committed to its rise. His implied argument was that the U.S. government has no choice but to make it go up.

It struck me, as he was speaking, that this might have been what Jay Gatsby was saying to his friends during the luxurious summer of 1929, a few months before Gatsby disappeared off the end of that dock in West Egg, on Long Island Sound, or went back to the Midwest -- which, for Gatsby, would have been worse.

It also struck me that this belief that Washington has the power to make the market perpetually go up contradicts what everyone in the markets has been saying during the past few years, which is that in the age of globalization and liberalization, governments are no longer relevant.

We have recently seen crashes in the Asian markets. Most Americans, including President Clinton, seem confident that the United States will not suffer from what happened in Asia. The general belief is that the U.S. economy now has been transformed into one that can only grow.

This seems to me a very romantic view of globalized U.S. capitalism, which by objective measurement has not proven notably more efficient than the post-World War II economy.

Low growth period

Since the end of fixed exchange rates in 1971, the major industrial economies have seen mostly lower growth, higher unemployment and lower productivity growth than before. They experienced a sharp deterioration in overall performance in the 1980s and early 1990s, as John Eatwell, president of Queens' College, Cambridge, notes in a new Swedish Foreign Ministry assessment of globalization. Growth of GNP in the major industrial countries during the 1983-1992 period was about half that of 1964-1973. Growth of GNP per capita during both periods was lower than in the immediate postwar period in 18 out of the 20 OECD countries.

It is true, as Mr. Clinton recently said, that "over any given 15- or 20-year period, the stock market has always outperformed . . . government bonds." One reason this is true is that world war and cold war drove the economy. As recently as the Reagan administration, the United States gave itself a solid stimulus of Keynesian deficit spending.

Bet on bonds

The other reason Mr. Clinton is right about the stock market is that you knowingly accept a fixed return from bonds because your money is safe. Stocks may outperform bonds on the way up, but stocks can also ruin you by going down. It's all in the timing.

The United States has been the principal beneficiary of globalization. The largest net international transfer of resources between 1983 and 1992 was to the United States, at an average rate of $100 billion per year. After 1992, there were big net transfers of both portfolio and direct investment to Asia and to Mexico as a result of market liberalization there, leading up to financial crisis in both places.

The fact that the U.S. investors escaped major losses in those crises, thanks largely to U.S.-promoted IMF rescues, has added to Americans' sense of invulnerability in the new economy. This undoubtedly is influenced by the parallel American sense of political and military invulnerability. The same friend said to me, "Do you think any other empire has ever been so powerful?"

I said that in sheer physical power, the answer obviously is no. But Greece, Rome, the great Arab empire of the eighth to 12th centuries, Spain and Portugal, Britain, France -- all left more profound and even positive cultural marks on the foreign societies they dominated than the United States has.

America's global hegemony is only a few years old. It is not unreasonable to argue that we're experiencing the peak of America's influence. But even if that is wrong, I cannot believe that the U.S. market can only go up, which would mean that we have found the alchemists' stone -- an unlikely story, as Jay Gatsby himself would have acknowledged.

I would stick with an older American assumption, that if something seems too good to be true, it probably is.

William Pfaff is a syndicated columnist.

Pub Date: 5/12/98

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