The Crisis Is Global
We should not fool ourselves that the recent sell-offs in world stock markets simply reflect a nervous reaction to Russia's turmoil or a long-overdue "correction." They signify instead a gathering fear that the global economy is drifting toward a dangerous slump, driven by forces that world leaders only vaguely understand and seem powerless to affect. Even those supposed titans of global finance -- Treasury Secretary Robert Rubin and Federal Reserve Chairman Alan Greenspan -- give little hint publicly that they grasp the threat or know what to do about it.</br></br>This is no longer a minor "Asian" crisis. Japan's recession is its worst since World War II. Latin America's economies are slowing. "Mexico's economy -- which had been growing 4 to 5 percent -- will be lucky to grow 2 percent next year," says economist Desmond Lachman of Salomon Smith Barney. Russia's depression hurts its Eastern European trading partners. China is slowing. Together, these areas represent almost half the world economy's output. The United States and Europe, with another 40 percent of global gross domestic product (GDP), cannot easily escape the fallout.</br></br>Given today's prosperity, Americans are naturally disbelieving. Unemployment is 4.5 percent. Inflation barely exists. Exports -- the sector directly affected by the global slump -- are only 12 percent of U.S. GDP. But economists (and others) often blunder by projecting the present into the future. America's prosperity is precarious precisely because things can't get better; they could easily get worse.</br></br>How? The economic expansion began in 1991. Americans have already bought lots of cars, computers and clothes. Consumer debt (including home loans) is high. In the first half of 1998, the personal savings rate was less than one percent. Until recently, the jubilant stock market made Americans feel wealthier. They are spending some of their stock profits; since 1992, annual realized "capital gains" have roughly tripled. Now, lower stock prices could dampen confidence and consumer spending, which is two-thirds of GDP. Exports are already weakening; rising imports further imperil domestic production. Why, then, would companies continue to increase investment (11 percent of GDP)? A recession is clearly possible.</br></br>And a U.S. slump would compound everyone else's problems. The United States is the world's largest importer, and other countries -- from South Korea to Brazil -- need to export to recover. Lower interest rates would improve the outlook. Economist Gary Hufbauer of the Council on Foreign Relations rightly says that the Federal Reserve and Germany's Bundesbank should cut rates by half a percentage point. Lower rates would ease debt burdens and help sustain consumer spending and home-buying.