Saved by Greenspan’s Exuberant Money Policy
Alan Greenspan revealed last week, in an almost unnoticed comment in his testimony to Congress, that he is indeed King of the World.
The chairman of the Federal Reserve explained to the House Ways and Means committee that last fall, because of fears in world financial markets over Russia, Brazil and Asia, the Fed had acted to expand the supply of money circulating in the U.S. and world economies.
Greenspan and the Fed governors saw the U.S. economy threatened by a world credit crunch and acted to keep credit flowing. This was a broadening of the vision Greenspan showed in October 1987 when he pumped money into the U.S. banking system after the stock market crashed. The Federal Reserve expands the nation’s money supply by various means. It works with the Treasury to disperse funds into the banking system; it can lower the interest rates banks must pay for government funds; and in many other ways the Fed can allow banks to lend more money.
In the latest instance, the Fed’s actions were decisive: The supply of money in the U.S. economy has been expanding at more than 11% on an annualized basis, double the rate of any other major economy. And the results have been quietly successful: Despite strains and worries from Brazil to Asia, world financial systems have not seized up, credit has flowed, stock markets have functioned.
Do such global finance activities touch your life? You bet they do. The most dramatic impact of the Fed’s actions, naturally, is on the U.S. economy. When final figures are in, U.S. economic growth for 1998 will come in close to 4%, an enormous gain.
Because of the expanded money supply, growth for 1999 will be more than 3%, predicts economist Stephen Roach of the Morgan Stanley investment firm. That’s well above consensus forecasts of 2% growth issued by economists only weeks ago.
That difference in growth isn’t chicken feed. It represents $88 billion in additional goods and services that will be produced in the U.S. economy this year, the equivalent of 3.5 million jobs paying $25,000 a year.
The expanded money supply is why the stock market remains buoyant, says Peter Canelo, investment strategist for Morgan Stanley. Even with occasional declines such as the dip that hit many stocks on Friday, the share prices of the larger, better-known companies are at or near historic levels.
Foreign investment, flowing into U.S. securities in unprecedented amounts, also is boosting the stock market.
In fact, things are moving so fast that fears abound that the stock market and the economy will fall off a cliff. The U.S. economy looks like a “bubble,” said Japan’s Deputy Finance Minister Eisuke Sakakibara last week, echoing sentiments heard in many parts of the world.
But it’s not a bubble.
To be sure, it’s an uncertain world, and there are unwise risks in it--Internet stocks, to cite an example. But the economy, helped by continued low interest rates, is making solid gains. The pace of housing construction, for example, is historic--1.6 million homes built last year, and a comparable number likely for this year. Car and truck sales are projected to run above 15 million once again.
Furthermore, the U.S. is not an island of prosperity. Home building and consumer spending will pick up in Europe this year as interest rates ease.
Ironically, even Y2K problem worries will boost the economy. In the second half of the year, as companies everywhere look toward the year 2000--and possible computer troubles in the transition--”they will build up inventories so as not to be caught short,” Canelo says.
The best way to deal with fears is to separate reality from hobgoblins. Reality is that global companies are reporting fairly good earnings these days because computer and communications technology helps them do things at lower costs.
IBM reported last week that its new business of supplying networking services and systems to global companies is growing rapidly, especially in Europe. Investors recognize that the company is in the business of supplying tools of efficiency, not merely hardware or software, to an eager world market. Thus IBM’s stock is selling at historically high levels, even with the hit it took Friday.
Major automotive companies, including the newly formed DaimlerChrysler, are selling at high prices. Investors note the earning power of the major auto companies and the promise for their business as economies recover going into the next century.
Energy companies, from Exxon to Enron, are attracting investors despite low oil and natural gas prices at the moment.
With Asia and Latin America still troubled, not all is rosy, of course. But with investment funds flowing around the world in unprecedented amounts, the underlying possibilities in the global economy need to be recognized, along with the dangers.
“The dimensions of global investments from corporations and governments and the speed at which money moves is unprecedented,” notes USC professor Jonathan Aronson, coauthor of the 1993 book “Managing the World Economy.”
It is that global system that was reassured last fall when Greenspan and the Federal Reserve acted to boost the money supply. “Financial markets, after freezing up temporarily following the Russian default, are again channeling an ample flow of capital to businesses and households,” Greenspan testified to Congress last week.
Yes, there are “bubbles.” Internet companies such as Yahoo, Amazon.com, EBay and others have ballooned to incredible prices on trading by eager investors. But professional investment managers for pension and mutual funds say that even the best of the Internet companies are priced at four times any values that might be realistic.
What will happen when reality dawns? When the Internet stocks tumble, as they began to do last week, will that send the wider stock market into a nose dive? Probably not. Major institutional investors by and large are not in the Internet stocks. They’ll have no reason to panic when they fall.
“The American economy through year-end continued to perform in an outstanding manner,” Greenspan told Congress.
The real danger, one economist said half in jest last week, is that people will think Greenspan can solve all their economic problems. He can’t--but to date, his record isn’t bad.
James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.
