Asia crisis fades from US radar

What President Clinton a few months ago termed the "greatest financial crisis in 50 years" has faded away for the United States.

The economic typhoon blowing in from East Asia and Russia has become a breeze in the US.

A few economic forecasters, however, remain gloomy. The Levy Institute in Mount Kisco, N.Y. forecasts recession, modest deflation, and "serious financial consequences."

"For the global economy, 1999 is likely to be the worst year of the past half-century," predicts economist David Levy.

Most economists, though, are far more cheery for the US, especially since 1998 went out with a bang.

National output rose at an after-inflation annual rate of 3.7 percent in the third quarter. With holiday sales apparently strong, economists figure the fourth quarter was peppy too.

Merrill Lynch's chief economist, Bruce Steinberg, estimates gross domestic product for 1998 rose at a handsome 4 percent annual rate.

The consensus forecast among economists for this year's growth runs about 2 percent - not bad at all. Talk of deflation, growing unemployment, and rising business failures has faded.

How come?

It's because the Federal Reserve has pumped up the nation's money supply, explains Allan Meltzer, an economist at Carnegie Mellon University in Pittsburgh.

Three interest-rate cuts by the Fed in the autumn of l998 have helped boost the money supply by an annual rate of 15 percent.

The economy, Professor Meltzer adds, has never sunk into a slump when money - the fuel for economic activity - has been growing rapidly.

"There will be no recession in 1999," predicts Meltzer. "The economy will continue to grow at a good rate" - about 2.5 percent.

It is not that the Asian crisis had no impact on the US. With deep currency devaluations in much of East Asia, imports from the region soared. American exporters suffered.

As a result, many US manufacturers and some other industrial firms have been hit hard. The National Association of Manufacturers urges the Fed to cut interest rates further and Congress to cut taxes to boost the economy.

But trade does not dominate the huge US economy. The output of Los Angeles is bigger than that of South Korea. The economy of Malaysia is smaller than that of Connecticut.

What happened, says Mickey Levy, chief economist of BankAmerica Corp. in New York, is that the mix changed in the US economy.

Lower interest rates stimulated the housing market and purchases of cars and consumer durables. Service activities thrived.

With oil prices cut in half over the past two years, consumers have more money to spend on other goods and services.

Business has seen its energy costs slashed. It has spent a great deal on new plants and equipment.

Meltzer expects the next interest-rate move by the Fed to be up, not down. He welcomes the central bank's decision not to lower rates again during a Dec. 22 meeting of its monetary policymakers.

At their November meeting in Washington, these policymakers did cut short-term rates one-quarter of a percentage point. But the Fed's summary of their discussion emphasized that a "further easing [of rates] was not likely to be needed over the months ahead."

Some of the money being created by the Fed is going into stocks, especially those of the largest 50 companies. Small company stocks haven't enjoyed the same success.

As long as the money supply keeps growing, however, stocks should do relatively well, Mr. Levy at BankAmerica suspects.

Fed officials are aware of the rapid growth in money and the risks of a stock-market bubble.

If the Fed does tighten monetary policy, investors should watch out, Levy and Meltzer agree. Stock prices will tumble.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK