John RapleyIT'S OFFICIAL now: Japan's back in recession, dragging the rest of east Asia down with it. Europe is skirting recession, and the Americas are over the edge. All indicators now suggest that the US itself is in a slump. Thus, for the first time in a generation, all the world's major economic poles are experiencing a simultaneous slowdown. Moreover, current industrial production figures reveal that the US manufacturing slump has been the longest since the Great Depression.
How bad can it get? Although their optimism is wearing thin, Wall Street's bulls are still saying never fear, Alan Greenspan is here. The chairman of the Federal Reserve Board has slashed interest rates to their lowest level since the 1960s. By reducing credit costs, and so debt payments, he has thereby freed up hundreds of billions of dollars for American shoppers, not to mention corporate directors. Add to this the tens of billions of dollars that Congress has approved to bail out those industries affected by September 11, and a recovery in spending can only be around the corner.
By the middle of next year, reason the hopeful, the American economy will be back on track. Then, as it did in the wake of the Asian crisis, a booming US will drag the rest of the world back out of the doldrums. Already stock prices have rallied in anticipation of the rebound. This is good news. During the 1990s, as more and more ordinary Americans bought shares, they drove up share values and, as a result, boosted their incomes. So when share values dropped, they cut back their spending. So the new-found stability on Wall Street may support spending.
On the other hand, stock prices are still down on the year, and at current earning levels, are unlikely to rise much higher for the time being. So they will add no new income to American wallets. Nor will the job market. With layoffs rising, Americans are growing wary of unemployment, and so are putting off spending plans. Instead, they are putting money aside for a rainy day (which for many of them has already come).
This appears to be Mr. Greenspan's biggest problem. To date, the evidence suggests that Americans are using the money he has made available to them not for spending, but for saving. This was bound to happen, since during the boom days, the American savings rate plummeted while debt levels soared. So it is not surprising that Americans are using the opportunity to get their financial houses back in order.
It is true that sales have rebounded from the lows they hit after the September attack. Yet this appears to have resulted mainly from steep discounting by retailers eager to clear their stock. Such sales lure customers, but also eat into profits. If the customers keep coming back and sellers are able to boost their prices again, then the current stock-market values may hold (although Mr. Greenspan will then have a new headache, namely resurgent inflation). But if a sustained rebound in buying does not occur, profits will remain depressed. Share values will then be likely to plunge again.
The problem then may be especially thorny. With its aggressive loosening of money supply, the Federal Reserve has taken a gamble. It has put all its energy into a full offensive, but if the offensive fails, it will be exhausted by the effort. For with real interest rates now near zero, the Fed will have little room left to cut. And with the US government already going into deficit to fuel its war effort and stimulate the economy, long-term interests have little room to slide further.
The coming weeks may well be crucial. Possibly by Christmas, we will know if all this extra money is finding its way into the tills. But if it continues to work its way into savings accounts which frankly at the individual level is probably the sensible thing to do with it the rebound may not come soon.
The US's problem is that it is still working out the excesses debt, over-investment and thus surplus capacity, eroded savings that accumulated during the boom years. And by allowing the stock market to rise so high in the 1990s, Mr. Greenspan must share part of the blame for those excesses. His brow may be perspiring just a little, and his fingers crossed.
John Rapley is a Senior Lecturer in the Department of Government UWI, Mona.
