Q & A : New World Order Will Include Everyone
Keeping in mind that change is the only certainty in the enormous and complex global economy, a few simple questions and answers may help us to understand what’s up with the world’s business and our own money.
Q: Will low interest rates, reduced still further by the Federal Reserve last week after a worrisome unemployment report, revive the U.S. economy?
A: No. The Fed’s latest action is unlikely to have any more effect than the other interest rate cuts it has made in the last two years. The plain fact is that business isn’t borrowing, it is paying back loans. The latest Federal Reserve figures show total business debt falling year to year for the first time ever.
Deflation is the reason. With prices of commercial buildings and other assets declining, financing on borrowed money gets expensive no matter how low the interest rate.
Still, if most big companies wanted to expand, they could. They’re flush with cash because they’ve paid down debt, and interest rates on loan balances are low.
But small companies that want to borrow can’t do so because banks aren’t lending. Gun shy after the 1980s, and required to repair tattered balance sheets, banks are borrowing from the Fed--or from depositors--at 3% and investing in five- to 10-year U.S. Treasury bonds paying 6% and more. Bank holdings of Treasuries are now larger than commercial and industrial loans.
Such activity helps finance the federal deficit, which is running at $360 billion this year, but it doesn’t help small business or create jobs. And if that seems circular and unproductive, think of it as one more consequence of the federal deficit, which keeps long-term interest rates high.
It may be no consolation, but other big economies are in similar difficulties. Japan is struggling to shore up inflated real estate and stock market values, and Germany is strangling its own economy and those of other European countries to pay for the reclamation of what was East Germany.
Q: So, are we descending into a global depression, as we did in the 1930s?
A: No, almost certainly not. Truth is, new evidence shows that the world economy is becoming larger than we have known it in the past. Economist Irwin Kellner notes that industrial commodity prices have risen 8% since last February. That’s the first rise in prices since 1989 for copper, lead, rubber, cotton, tin and other commodities. And it indicates that, somewhere, industry is starting to hum.
That could signal a U.S. recovery, says Kellner, who is chief economist of Chemical Banking Corp. But mostly the commodities are being used in Latin America, Southeast Asia and Eastern Europe.
That is no small story. The most important economic development of the 1990s will be the surging industrialization of Mexico, Vietnam, Argentina, Poland, Indonesia, Russia, India and China. These countries, containing a majority of the world’s population, but barely a third of its total output, have not really participated in the global economy.
“Now they have been made eligible for investment,” says John Rutledge, head of Rutledge & Co., an economic consulting firm in Greenwich, Conn. Their governments have instituted economic reforms, and the world’s leading finance houses and banks are helping to formulate projects and organize financing.
Capital will flow to these poorer countries because, ambitious and coming from nothing, they offer a high return on investment, says Rutledge.
Robert Reich, economic adviser to Democratic presidential candidate Bill Clinton, agrees. In the new world economy, modern factories can be erected in the most remote corners of the globe, he says, and work can be done as easily in coastal China as in Darmstadt or Cleveland.
What that means, among other things, is that capital will be scarce.
Q: Does that mean higher interest rates ahead? And if so, should ordinary savers now keep their money in short-term CDs and wait for the upturn?
A: Yes, the probable outlook is for higher interest rates in the next few years. But timing is everything, and predictions are tricky. Productivity increases, which hold down inflation and interest rates, also will characterize the world’s economies in coming years.
A good bet for small savers, says economist Kellner, would be U.S. savings bonds, at three- to five-year maturities. They pay more than CDs and offer safety as well as flexibility.
For longer-term investments, think common stocks of companies exposed to the new world trade--in which brains and know-how will be the real exports. Mexico, for example, needs basic sewage facilities. But that doesn’t mean it will import cement. Mexico makes its own cement. But the design and know-how of sewage treatment systems could well originate in the United States.
Telecommunications, computer and machinery companies will benefit as the United States becomes, in President Bush’s phrase, “an export superpower.”
And playing a central role will be the financial brains that now are helping emerging economies--investment bankers such as Morgan Stanley and First Boston, and banks such as J.P. Morgan and Citicorp, which can take advantage of a strong global network if it comes through its difficulties with bad real estate loans.
In a way, the world is like Citicorp: trying to put the ‘80s behind it, to enjoy the global ‘90s.
