Signposts Will Mark Economy’s Direction
In a worrisome time for the world economy, wait for evidence and be wary of forecasts.
The White House last week conceded the U.S. economy is in recession but financial experts are looking for worse, conjuring up parallels to the 1930s’ Depression and talking of recession spreading worldwide.
The least-bearish forecasts see Asia and Europe prospering but the United States suffering. Germany, as the leader of East and West Europe, is seen as the economy to watch in the ‘90s. That’s one reason the deutschemark is strong and the dollar is weak.
Trouble is, those forecasts range from crackpot to dubious. Parallels with the 1930s are completely wrong, and global recession is but a weak threat. The U.S. economy may do better than expected, and the German outlook may be significantly worse.
In any event, you’ll get a better handle on the situation if you forget forecasts and watch a few signposts to the world economy--some of them technical but none beyond the reach of daily newspaper reports.
Watch:
* German interest rates.
* The U.S. money supply.
* World trade negotiations.
* Prospects for U.S. agriculture.
Within the next few months each will give a signal as to the real direction of the U.S. and world economies.
Start with Germany. Karl Otto Pohl, president of the Bundesbank--Germany’s version of the Federal Reserve--is keeping German interest rates high, over 9%, to hold down inflation.
This has drawn investment to Germany and commendation from currency traders who like Pohl’s backing of a strong deutschemark.
Which is curious, because Pohl’s policy arises as much as anything from political weakness. There are problems in East Germany. In taking over the former Communist state last year, the Bonn government valued East German factories at $400 billion. But the properties, in fact, are worthless. So Bonn has the equivalent of a Resolution Trust Corp. in the East.
Further, to encourage a yes vote on German reunification, West German Chancellor Helmut Kohl made a generous exchange of deutschemarks for East German currency, thus handing massive purchasing power to 17 million new consumers who hadn’t earned such power.
But Kohl didn’t tax West Germans to finance the welcome of the Easterners. The result, along with a record Christmas in German stores, has been a government deficit of $100 billion--proportionately much higher than the U.S. deficit--and rising German inflation.
So Germany is keeping interest rates high to attract foreign investment to finance its deficit, just as the Reagan Administration did in the early ‘80s--when the dollar soared in value as the mark is doing today.
U.S. interest rates had to come down in 1985 because the strong dollar was hurting U.S. exporters. Germany’s strong mark is pinching a far larger group, the 10 European nations whose currencies are tied to the mark in the European Monetary System. As the mark rises, so France and others must raise interest rates to support their currencies, thus slowing business expansion in their countries. France is hurting and complaining, and Britain is in deep recession.
The upshot is that for Europe to grow rapidly, Pohl will have to ease interest rates. And that would boost opportunities for U.S. goods and services. Watch for news of such easing in the next few months.
The broadest measure of the U.S. money supply, M3, includes currency in circulation, checking and savings deposits in banks and also large deposits in U.S. banks here and abroad. In the last year M3 stopped growing as banks, with little demand or desire to make loans, stopped reaching out for deposits. If M3 starts to grow in 1991 it will be a sign that banks and businesses are regaining confidence, says Charles Clough, investment strategist for Merrill Lynch. Watch financial pages for money supply growth by spring.
Or sooner, according to the economic research firm of Lehrman Bell Mueller Cannon in Arlington, Va., which includes dollars held by foreign central banks in a global money supply indicator called the “world dollar base.” When foreign dollar holdings grow, they increase the market for U.S. goods or Treasury bills, explains John Mueller, a partner in the firm.
Right now, he reports, “the world dollar base has been growing for eight months, and that means U.S. industrial production will pick up as early as the second quarter.”
Negotiations to expand the General Agreement on Tariffs and Trade, which has brought the world expanded trade and prosperity for 43 years, broke down in December. That raised a specter of the 1930s, when trade disputes helped turn a financial recession into a depression.
But fears of new trade wars are misplaced, says Washington trade consultant Harald Malmgren. “The GATT talks recessed because they had reached points too sensitive for economists,” he says. President Bush, Chancellor Kohl and French President Francois Mitterrand are discussing political questions of farming and industry, and their agreements will be ratified by GATT negotiators early this year. Watch for a renewed GATT agreement in February.
And watch U.S. agriculture. This is not the 1930s, when the Soviet Union dumped surplus food on world markets and depressed prices. Rather, the ‘90s promise opportunity for U.S. grain and other food exports to China, the Soviet Union and to newly industrializing countries such as Korea where agriculture has not kept pace with growing urbanization. Watch U.S. commodity markets for corn and soybean prices to rise by spring.
Signposts don’t make a hard road easier to travel, but they do make it less fearful. And these days that’s often blessing enough.
