The year of the Asian crisis U.S. economy: Strong but slowing, as Japan's inertia bodes growing recession.

July 10, 1998

IN THE YEAR since Thailand inaugurated the Asian economic crisis by letting its currency float and sink, the U.S. economy has held up beautifully. The flight to quality investments of transient capital has bolstered both stocks and bonds on Wall Street.

The first effect here of the Asian slowdown was to remove the incentive for the Federal Reserve Board to raise interest rates. Japan's reluctance to act in its own economic self-interest, however, means the impact on the U.S. economy has begun to grow.

Others in Asia have begun to act. Thailand made the reforms that the International Monetary Fund required. Malaysia, with domestic bank problems but not much international debt, kept the IMF at bay while making some reforms. Indonesia agreed to reforms, but its political problems have prevented them from working.

But the crisis wasn't going to end until it ended in Japan, where it is just coming to a head. Resisting pressure from the IMF and Washington to reinflate with a Keynesian budget deficit, the government of Ryutaro Hashimoto is now hinting that it may do just that.

Japan's basic problem, is the old Maryland savings and loan crisis writ huge. Banks, with no evaluation of risk, lent to favored clients based on cronyism, reciprocal favors and political influence. Many Asian banks have huge bad debt, much of it for projects in the other countries that came to grief.

The difference is that Japan's economy is much larger than theirs. The slowdown gathering force there could cast more pall here than anything yet. The same might be said of China, with similar risky loans and its strange mix of Communist command management and free market economics. China has resisted devaluing its currency, but Chinese manufacturers worry that their prices are too high compared with competitors in countries with devalued currencies.

The Asian slowdown is beginning to make itself felt more palpably in the U.S. economy, with reduced earnings and employment in companies dependent on sales to Asia. If the Asian crisis gets worse before it gets better, this effect will grow.

Pub Date: 7/10/98

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