SwitzerlandAs 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
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
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
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
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.