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Bottom Fishing
Since the onset of the world financial crisis (marked by the collapse of Thailand's currency in July 1997), its most perverse effect has been to benefit the economies of the U.S. and Europe. Perhaps only on the surface, and temporarily; but an unmistakable benefit.
The mechanism has been clear: lifetime lows in oil prices have had the effect of an enormous tax cut. Historical lows in all commodity prices have reduced inflation to undetectable levels, which in turn has resulted in interest rates reaching 30-year lows. Few conditions stimulate stock prices more than low interest rates.
A group of Europeans and Americans are gathered at the bar in the 1st Class lounge on the Titanic. The Chief Steward rushes in, carrying a gleaming tray piled high: "Ladies and gentlemen! Grand news! Fresh ice, just found on deck!"
The failure of the IMF interventions has heightened the sense of unreality in our good fortune thus far. The IMF has two semi-successes in the last year: Korea and Thailand. Abject failures include Indonesia and Russia, where tens of billions ran through sieves into the accounts of kleptocrats; and where for the first time IMF "loans" may not be repaid. Mexico's recent band-aid is slipping, and a new one for Brazil will just about clean out the box -- unless and until Congress provides a new supply.
Strolling on deck outside the portholes of the 1st Class lounge, Captain Smith: "There are several ways to do it, of course; but seating in rows of three would be a nice way for our passengers to enjoy the crossing." Mr. Andrews: "Tidy, yes; but they might prefer family-sized, conversational groups of four or five, chatting away the voyage" Smith: "A great liner must be tidy, shipshape... rows, I think... two if you like....".
Today, some relatively minor cracks show in the Western economies which constitute roughly 60% of the world total. Their farm and commodity-producing sectors are suffering, and their trade deficits are rising to dangerous levels. Admittedly overbought Western stock markets have given up most of their 1998 gains, perhaps signaling awareness of diminishing perverse effect, and profitability as well.
The machinery for reversing the perverse benefit is not so clear. "Deflation" is no big deal if confined to commodities. Deflation can lead to crash only through the money-extinguishing effect unique to banking-in-reverse, just like Titanic's bulkheads, overwashing inevitably one by one. It would take a big collision, but a rip across the hull at the Japan bulkhead could start such a cascade.
"This could be it!"
I think not. All panic reaches bottom, and very rarely as deep as seemed likely on the way down.
We have had world commerce since Magellan; but we do not remotely have an integrated world economy. It should not surprise anyone that the world is not uniformly ready for market capitalism. Nations cannot make more economic reforms than their very different political systems can support. The United States has developed its controls and transparency over a very long time: the America of 1912 could not have survived today's ruthless, electronic, instantaneous markets for five minutes.
China is not yet integrated in the world economy, to its great benefit this year. To have Russia, Indonesia, Malaysia, and Hong Kong fail to make this round of entry and withdraw from markets is disorderly, but not a guarantee of depression or even world recession. If Japan turns inward, embalmed in politically insoluble self-inflicted wounds, the world will move on without her.
The apparent shortage of lifeboats is misleading. The IMF grand plan was worth trying, but did not work; but it should not be confused with a circuit breaker. That function belongs to Western central bankers who have the wisdom and resources (I hope and believe) to prevent cascading failures among Western banks.
Besides, there are islands of stability, like Taiwan; and shaky but muddling archipelagoes like the Philippines. And whole continents: Europe has succeeded in financial integration on a model which can be replicated in other regions. The impossibility of the euro now seems a done deal: bond yields are the same in France, Germany, Spain, and Italy. When debating monetary policy, the French and Germans now sound like Democrats ("Jobs!") and Republicans ("Hard money!").
World commerce at the moment resembles the American economy at the time of the Titanic's first and last crossing. The Federal Reserve would not be created until the next year; commercial transparency was a suspicious "socialist" notion; market manipulation was honest work for leading citizens; welfare for weaker members of society was a confession of decadence; union strikers could expect to be shot by soldiers carrying the same flag... but promise; oh, my, what promise!
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