What's So Bad About a Recession?
Philip Bowring International Herald Tribune
Thursday, January 25, 2001
DAVOS, Switzerland As the World Economic Forum begins its annual meeting, almost everyone is fretting about a possible U.S. recession and the dangers that poses for the world. But should they be? Recessions are natural events that purge excesses.
.
Most of Asia recently had a recession lesson that was extraordinarily painful partly because it was so long delayed. By many of the criteria applied in Asia - current account deficit, private sector debt, stock prices to gross domestic product - the United States is in need of catharsis. Interest rate cuts to prevent a precipitate collapse of demand may be justified, but a sustained period of minimal growth, especially of credit, is essential.
.
Yet the pile of newspaper cuttings before me focus not on the excesses, not on reducing debts, not on improving corporate and household balance sheets. The key phrases are "how to jump-start the economy," "more consumer stimulus," "slash interest rates again" and "tax cuts now."
.
The prescriptions differ but the goals are similar: how to keep economic growth at 2.5 percent or above. The imbalances, it is assumed, can be left to another day.
.
Maybe. But to ignore them is to store up even bigger problems a year or two from now.
.
It is not just Americans, unused to economic pain, who are pressing for more U.S. growth regardless. Europeans and Asians are almost as guilty. While quietly criticizing U.S. hubris in assuming that the whole world revolves around Alan Greenspan, they buy the notion that they are dependent on continuing U.S. growth.
.
This is an admission that their prescriptions for their own economies and currencies are so inadequate that they have to rely on someone else's excesses. One country can create a credit binge, but it takes two to make an unsustainable trade imbalance.
.
The International Monetary Fund, meanwhile, is turning a blind eye to U.S. deficits while continuing to lecture Asia about "reform." Just as the IMF ignored deficit excesses in pre-crisis Asia because fiscal policies were contractionary, so it now takes comfort in the U.S. fiscal surplus while ignoring the U.S. debt explosion. When Asia (except Japan) needs continued fiscal stimulus to reduce dependence on exports to the United States, the IMF is again pressing fiscal "responsibility."
.
This is the moment to be talking about increasing U.S. savings, not consumption, and vice versa elsewhere. U.S. consumer confidence may have fallen sharply recently, but that was after a year when money supply grew by 9 percent, credit card debt grew by 12 percent and (as in late 1980s Japan) nonbank financial intermediation rose at breakneck speed. The fall in long-term interest rates is still feeding the rampaging beast of household debt. The balance sheets of the huge quasi-government mortgage lenders, Fannie Mae and Freddie Mac, alone grew by $113 billion, an annual rate of 24 percent, in the second half of 2000. Mortgage refinancing is booming as households increase their borrowing, using their homes as collateral, and consume more.
.
Borrowing against inflated real estate to fund consumption seems as dangerous as the Nasdaq boom and bust. The Japanese know what happens when over-leveraged assets fall in price. The British know the devastating impact that secondary mortgages backed by unrealized capital gains have on a banking system.
.
In escaping its debt trap, the United States has the advantage over Asia that its debts are all in its own currency. Nor does it fret about inflation, as do Germany and Japan. Some wage and price inflation would ease adjustment. So would a dollar slump, which would be especially helpful for U.S. multinationals and the trade deficit. James Baker engineered one when he became treasury secretary in 1985. President Richard Nixon's "benign neglect" of the dollar was beneficial, too.
.
Interest rate cuts that prevent a seizing up of the system may be justified by giving relief to overstretched households and corporations, but only if there is an end to the credit and consumption binges that Mr. Greenspan has permitted. And that necessarily means stagnation in consumption.
.
If Europe and Japan could see the opportunity that a U.S. recession would present for them to stimulate demand without causing inflation, they would help themselves and help the United States achieve its overdue adjustments.
.

For Related Topics See:
Opinion & Editorial

< < Back to Start of Article
  Print Text Larger Text Small Single Column Mutli Column