Don’t panic… yet
How pleasing to return from holiday to discover that the chumps who manage our savings have finally woken up. But the pleasure in seeing US and European stock markets at a slightly less loopy level is marred by the extremity of the money men’s mood swing. Many of the people who recently shrugged off the problems of Asia as a disinflationary non-crisis now seem convinced that global deflation is imminent.
The excuse for all this gloom is fear of the so-called negative wealth effect-a presumed reluctance, especially on the part of Americans, to spend money when their stock market investments are shrinking in value. Yet Americans who returned from holiday this September were looking at a Dow Jones Industrial Average that was still 12 per cent higher than in December 1996 when Federal Reserve chairman Alan Greenspan complained about “irrational exuberance” in the stock market.
Having shrugged off this earlier caution the professional money men are now in a funk over Greenspan’s stunningly uncontroversial observation that the US cannot “remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.”
What has been clear since early this year is that the global economic prospect has been deteriorating as a result of incipient deflation in Japan and in the emerging markets. But the US economy is still growing strongly, while continental Europe is now well into a respectable economic recovery. To suggest that the whole world is running into a 1930s-style problem of deficient demand-the problem with which Keynes wrestled in his General Theory- is thus premature. At present only Japan with its excess savings and deficient demand lends itself to traditional Keynesian solutions.
If there are grounds for worry they lie not in the modest stock market slide but in the unbalanced nature of US economic growth. With household savings down to an astonishingly low 0.6 per cent of disposable income in the second quarter of this year, and with the US budget set to remain in surplus, it is hard to foresee what will drive the US economy as the millennium approaches. On anything but a short-term view, the rate of personal saving can only go up.
In a world that is excessively dependent on the US market-Europe runs a trade surplus with the rest of the globe-that is an uncomfortable predicament. All the more so, given that the US balance…