A loony look at global recovery

August 30, 1999|By Todd G. Buchholz

FOR more than a year we have heard the pundits and pooh-bahs say that weak foreign economies pose the biggest risk to U.S. markets and its economy.

The Thai baht crisis of 1997 was supposed to knock us down. Same for the Russian crisis of 1998. Ditto the Brazilian currency collapse of 1999.

Despite these falling dominoes, the U.S. economy has been growing at better than 4 percent, and the Dow easily pierced 10,000 earlier this year. Ma & Pa investor, who ignored the foreign headlines and kept funneling their savings into the market, proved smarter than the swamis. Hence my willingness to turn the conventional claims on their head and declare that stronger foreign economies pose the biggest risk to the U.S. economy.

Sounds loony, I know. Had I said that a dozen years ago, when I was teaching economics, I might have been tossed from Harvard Yard: Economics is not supposed to be a zero-sum game.

Appliance bonanza

Nonetheless, the collapse of Asia has been a boon to U.S. consumers and to many U.S. corporations. Thanks to devalued Asian currencies, we've been getting TVs, microwave ovens and computer chips at bargain prices, so our Consumer Price Index has stayed amazingly low.

At the same time, the emerging markets (and a sagging Japan) have reduced their purchases of such commodities as gold, oil and copper, allowing U.S. firms to snap up raw materials at record low prices and widen profit margins.

Furthermore, as foreign companies enter bankruptcy, they stop borrowing money. That has meant lower rates for Americans borrowing to buy homes and cars. When the foreign economies heal, however, Americans will lose these freebies.

As Asian countries have begun to recover, the value of their currencies has risen. Their goods will look more expensive to U.S. consumers. Asians will begin borrowing more funds for new investments; worldwide interest rates will creep up. And stronger foreign economies will use more commodities.

We have gotten used to falling prices for commodities and foreign goods, deflation that has offset the inflationary pressures of a tight labor market. Under this "world rebound" scenario, the Federal Reserve might feel compelled to raise interest rates even more.

Slow down ahead?

By mid-2000, higher rates could put the brakes on the U.S. economy, especially slowing the now surging car and housing markets. We could even tip into a recession.

Even though some U.S. exporters would enjoy the world rebound, most consumers would feel the injury. But wait, could the United States be better off if the rest of the world remained in recession? Not for long.

We have benefited from Asia's collapse in the same way that a shopper benefits from a going-out-of-business sale, by picking up existing inventory below cost. But once the shelves are empty, there are no more bargains.

Likewise, Asia's fire sale could not last much longer, because its firms were closing their doors. If we could somehow keep Asia in recession, its manufacturers could not afford to build more bargains.

In the long run, we are better off if the rest of the world is strong. But the short run, from late 1997 until now, has been a swell party for American shoppers.

Todd G. Buchholz is a contributing editor to Worth magazine and is the author of "Market Shock." He wrote this for the Chicago Tribune.

Pub Date: 8/30/99

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