Ferocious competition
Bond traders are, by nature, skittish and high-strung folk who tend to react even to mundane announcements as if they had just received news of the Apocalypse. On Feb. 4 and then again on March 22, Fed chairman Alan Greenspan tried to nudge up interest rates in a prudent, cautionary style. This was less an attempt to stifle inflation than a measured attempt to forestall it. But the bond market, with its monomania about inflation and almost biblical sense of foreboding, heard the trumpet blasts of doom and sent the walls of the stock market tumbling down.</br></br>Pity poor Alan Greenspan. Believing that he was lighting a small firecracker, he instead touched off a major financial explosion on Wall Street. Yesterday President Clinton was forced to reassure a queasy public that "no one believes that there is a serious problem with the underlying American economy. It is healthy and it is sound."</br></br>Clearly, the stock market has arrived at a difficult turning point, grappling with the first tightening of monetary policy in five years. Throughout the 1980s and early 1990s, it enjoyed the giddy elixir of disinflation. Whenever the rate of price increases tumbles gently over a sustained period, financial markets tend to float up on a wave of euphoria. With that halcyon period now over, investors have assumed -- much too quickly, to my mind -- that we will now revert to the status quo ante, i.e. to the panicky inflationary turmoil of the 1970s.</br></br>If the world of the mid-1990s even remotely resembled those parlous days, such fears might be valid. But the reality is that stock traders now perceive the present through the darkly distorting prism of the past. With inflation running at a mild 3% rate and with the consumer price index in January actually registering zero, the inflation hysteria stems from memories of past behavior, rather than from currently observed phenomena. Scattered price rises in some metals, paper products and chemicals in recent months would hardly seem to warrant the grotesque theatrics of recent weeks.</br></br>During the pell-mell exodus from stocks and bonds, financial markets have overlooked a multitude of trends that will damp (but by no means eliminate) inflation in the remaining years of this decade. Today the world stands in the throes of ferocious competition, a highly creative if deeply unsettling force that is redrawing the economic landscape everywhere. Both at home and abroad, companies and workers are at the mercy of rapidly shifting markets, instead of being their masters. In corporate boardrooms, managers no longer plot to raise prices but contrive ways to cut costs and boost efficiency.