World Economy Under Test
Is the promise of the market-driven global economy of the 1990s unraveling? Hardly, but the very idea is facing its most severe test as economic troubles in Japan, Russia and elsewhere rock markets around the world, with little time for investors to think before reaction sets in. Wall Street swooned with uncertainty, leading to a huge sell-off Monday. Investors took no comfort from the fact that the U.S. economy is fundamentally sound.
Should market psychology worsen, consumer spending drop off and the specter of recession loom, the Federal Reserve Board could help soothe anxious consumers and businesses with an interest rate cut. The Fed might be tempted to hold interest rates steady to keep inflation in check, but deflation and recession elsewhere in the world could further crimp U.S. growth, which already is slowing. A rate cut would help buttress the U.S. economy and make it easier for other countries to strengthen their currencies. Perhaps most important, the United States would be taking a global economic leadership role.
Others might follow. Japan, the world’s second-largest economy, poses the biggest problem as the government dawdles in indecision, unwilling to face the shock of cleaning up a banking system festooned with bad debts.
The sell-off Tuesday on the Tokyo stock market as the downturn rocketed around the globe will make the bank cleanup even harder. U.S. Treasury Secretary Robert E. Rubin urged Japan to act, even as he reassured investors that the U.S. economy is strong despite the market drop. Rubin and Federal Reserve Chairman Alan Greenspan will meet with Japanese Finance Minister Kiichi Miyazawa in San Francisco Friday.
The Russian economy is tiny in comparison, but the depth of political uncertainty there is exacerbating fears that a world nuclear power is rudderless and thus dangerous.
The temptation around the world is to fall back to traditional self-serving fiscal and monetary policies as the global economy heaves and shifts. Japan is the most startling and troublesome example of a centrally controlled economy out of sync with the open capitalism driving markets today. Russia’s more spectacular failure at creating an honest market economy has some there pining for the old days. Even the Fed could find itself locked in its inflation ideology--but we’re betting Greenspan is too smart for that.
