Saturday, August 29, 2015
Thursday, August 27, 2015
Wednesday, August 26, 2015
USA's economy in 1990s
JUSTIN FOX
Oil prices are falling, seemingly inexorably.
Emerging-market countries are having currency
crises. A previously unstoppable East
Asian economic power — the world’s second-
largest economy — is slowing, and the country’s
leaders at times seem to have lost the plot. Russia is an
economic mess. Europe’s economy is being held back
by German political decisions and doubts about the
common currency. The US economy is relatively
strong, but is beset by a productivity paradox in which
remarkable Silicon Valley innovations don’t seem to
be having an impact on the economic data.
Is this year starting to feel like it belongs in the
1990s, or what?
I’m not going to even get into all the pop-culture
resemblances, or the fact that a Clinton and a Bush are
running for president and Al Gore has reportedly
been thinking about it. In economic terms alone,
there are a lot of parallels between the current situation
and that of the mid-1990s in particular.
I think all the parallels I mention in the first paragraph
are self-explanatory except perhaps the one
about German politics. So here goes: The 1990 decision
by Chancellor Helmut Kohl to let East Germans
exchange their largely worthless Ostmarks for
Deutschmarks at a 1:1 exchange rate gave the reunified
nation an economic hangover that lasted for years and
affected its neighbours too. In recent years austerity
measures forced on southern European countries in
part by German politicians have arguably again held
back growth in the euro area.
Now, there are also lots of things going on in 2015
that shouldn’t remind anyone of 1995. History doesn’t
repeat. I’m not even sure it rhymes. But there do
seem to be some similar economic forces at work.
One is that commodity prices are falling, as
they did in the 1990s. The other is that the US economy
has gone back to being the main driver of
global growth, which has brought with it a big
strengthening of the dollar. These two are related.
Even with the recent boom in domestic oil production,
the US is a net importer of commodities,
so falling prices tend to boost growth. This is also
true for the world’s other big economies — Western
Europe, Japan and China — but all these places are
facing economic headwinds that the US is not. So
the US share of global economic output has been
on the rise.
As the chart shows, during the long run the US
share is shrinking as other countries catch up in affluence.
But there’s been a strong cyclical element as
well. Now it looks as if the cycle may have turned, and
if that’s the case we’re likely to see a few more years of
the US gaining economic share just as it did in the second
half of the 1990s.
Much of this gain will simply be the work of a
strengthening dollar, which will put pressure on countries
that link their currencies to the dollar, as was the
case in the late 1990s. That will mean more emergingmarket
currency crashes and perhaps financial crises.
In the late 1990s those crises would scare investors in
the US and usually bring a temporary decline in asset
prices, but in the end the result was always more
money flowing into the US, and continued economic
growth. It finally took a homegrown stock market
bubble and crash to bring the fun to an end.
Alan Greenspan’s Federal Reserve of course
played a role in all of this — holding back on raising
interest rates in 1995 because of a (correct) hunch
that a productivity boomlet was coming (current
Fed Chair Janet Yellen was a Fed governor at the
time and supported this approach), then cutting
them in late 1998 in response to a Russian debt
default and the subsequent collapse of the hedge
fund Long-Term Capital Management. Cutting rates
will be a lot harder to do this time around with the
current effective federal funds rate at 0.15 per cent,
and there’s widespread concern that, after spending
the past six years trying to keep the economy afloat
after a historic financial crisis, the Fed doesn’t have
a lot of ammunition left.
So that’s one big difference from the 1990s.
Another is that the slowing East Asian juggernaut —
China this time instead of Japan — accounts for a
much bigger share of the global economy but is also
a lot poorer on a per capita basis, which could have all
sorts of economic and political ramifications. Yet
another is that while the US is still the core of the
global economy, it is a smaller core than it was in the
1990s and thus less reliable as a global growth locomotive.
Still, this does feel familiar. I’m just having trouble
deciding whether to find that reassuring or
alarming.
The writer is a Bloomberg View columnist. This column
does not necessarily reflect the opinion of the editorial
board or Bloomberg LP and its owners
The global economy’s 1990s look
The US is still the core of the global economy, but it is a smaller core than it was in the 1990s and thus less
reliable as a global growth engine. And China, like Japan two decades ago, is slowing
The US Federal Reserve (pictured), having spent the past six years trying to keep the economy afloat, doesn’t have the ammunition needed to tackle a renewed crisis
SHIFTING BACK TO THE CORE
The US share of the world economy is growing again
US GDP/World GDP, current US $
Source: World Bank
Oil prices are falling, seemingly inexorably.
Emerging-market countries are having currency
crises. A previously unstoppable East
Asian economic power — the world’s second-
largest economy — is slowing, and the country’s
leaders at times seem to have lost the plot. Russia is an
economic mess. Europe’s economy is being held back
by German political decisions and doubts about the
common currency. The US economy is relatively
strong, but is beset by a productivity paradox in which
remarkable Silicon Valley innovations don’t seem to
be having an impact on the economic data.
Is this year starting to feel like it belongs in the
1990s, or what?
I’m not going to even get into all the pop-culture
resemblances, or the fact that a Clinton and a Bush are
running for president and Al Gore has reportedly
been thinking about it. In economic terms alone,
there are a lot of parallels between the current situation
and that of the mid-1990s in particular.
I think all the parallels I mention in the first paragraph
are self-explanatory except perhaps the one
about German politics. So here goes: The 1990 decision
by Chancellor Helmut Kohl to let East Germans
exchange their largely worthless Ostmarks for
Deutschmarks at a 1:1 exchange rate gave the reunified
nation an economic hangover that lasted for years and
affected its neighbours too. In recent years austerity
measures forced on southern European countries in
part by German politicians have arguably again held
back growth in the euro area.
Now, there are also lots of things going on in 2015
that shouldn’t remind anyone of 1995. History doesn’t
repeat. I’m not even sure it rhymes. But there do
seem to be some similar economic forces at work.
One is that commodity prices are falling, as
they did in the 1990s. The other is that the US economy
has gone back to being the main driver of
global growth, which has brought with it a big
strengthening of the dollar. These two are related.
Even with the recent boom in domestic oil production,
the US is a net importer of commodities,
so falling prices tend to boost growth. This is also
true for the world’s other big economies — Western
Europe, Japan and China — but all these places are
facing economic headwinds that the US is not. So
the US share of global economic output has been
on the rise.
As the chart shows, during the long run the US
share is shrinking as other countries catch up in affluence.
But there’s been a strong cyclical element as
well. Now it looks as if the cycle may have turned, and
if that’s the case we’re likely to see a few more years of
the US gaining economic share just as it did in the second
half of the 1990s.
Much of this gain will simply be the work of a
strengthening dollar, which will put pressure on countries
that link their currencies to the dollar, as was the
case in the late 1990s. That will mean more emergingmarket
currency crashes and perhaps financial crises.
In the late 1990s those crises would scare investors in
the US and usually bring a temporary decline in asset
prices, but in the end the result was always more
money flowing into the US, and continued economic
growth. It finally took a homegrown stock market
bubble and crash to bring the fun to an end.
Alan Greenspan’s Federal Reserve of course
played a role in all of this — holding back on raising
interest rates in 1995 because of a (correct) hunch
that a productivity boomlet was coming (current
Fed Chair Janet Yellen was a Fed governor at the
time and supported this approach), then cutting
them in late 1998 in response to a Russian debt
default and the subsequent collapse of the hedge
fund Long-Term Capital Management. Cutting rates
will be a lot harder to do this time around with the
current effective federal funds rate at 0.15 per cent,
and there’s widespread concern that, after spending
the past six years trying to keep the economy afloat
after a historic financial crisis, the Fed doesn’t have
a lot of ammunition left.
So that’s one big difference from the 1990s.
Another is that the slowing East Asian juggernaut —
China this time instead of Japan — accounts for a
much bigger share of the global economy but is also
a lot poorer on a per capita basis, which could have all
sorts of economic and political ramifications. Yet
another is that while the US is still the core of the
global economy, it is a smaller core than it was in the
1990s and thus less reliable as a global growth locomotive.
Still, this does feel familiar. I’m just having trouble
deciding whether to find that reassuring or
alarming.
The writer is a Bloomberg View columnist. This column
does not necessarily reflect the opinion of the editorial
board or Bloomberg LP and its owners
The global economy’s 1990s look
The US is still the core of the global economy, but it is a smaller core than it was in the 1990s and thus less
reliable as a global growth engine. And China, like Japan two decades ago, is slowing
The US Federal Reserve (pictured), having spent the past six years trying to keep the economy afloat, doesn’t have the ammunition needed to tackle a renewed crisis
SHIFTING BACK TO THE CORE
The US share of the world economy is growing again
US GDP/World GDP, current US $
Source: World Bank
Friday, August 21, 2015
Monday, August 17, 2015
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