Today's date:



By Ken Courtis

Ken Courtis is vice chairman of Goldman Sachs for Asia.

TOKYO -- America has now entered the longest downturn in its history since the Great Depression of the late '20s and early '30s. Signs of recovery driven by interest-rate cuts and falling energy prices were undermined by the events of Sept. 11 and their aftermath.

This is worrisome since we know that Europe usually follows behind the U.S. cycle with a 6- to 8-month lag time. The emerging economies of Asia -- with the bright exception of China that is growing at 4 percent annually -- have slowed dramatically because they are driven by industrial production and growth in the United States.

The chief effect of Sept. 11 has been to compress a number of
developments, some good and some bad for recovery.

We have seen a more rapid sequence of coordinated aggressive monetary policies, tax cuts and budget increases in the United States and Europe. At the same time, corporations have cut back their excesses faster than they otherwise would have. Consumer spending has also fallen much faster than it otherwise would have, particularly in transportation and such big-ticket items as homes.

The last quarter of 2001 will clearly be the worst of the
current downturn. The good news in the bad figures is that the pain of this slump may be gotten out of the way much quicker than it would have under a normal boom-bust cycle.

In this context, the biggest risk in the advanced world is the rising
spread between what top-rated companies must pay to borrow versus those closer to a junk-bond rating, of which there are many today, where the cost of funds is 12-14 percent.

The other risk is the rising spreads in the emerging market economies. The fragility of these economies has driven rates on 10-year bonds to more than 20 percent -- making it impossible for many to raise funds to avoid default. Spanish banks with overexposed lending in Latin America are already being hit hard, and that could spread if the effects of Argentina's pending default cannot be controlled.

To lift the rest of the global economy -- absent Japan, which has
self-inflicted reasons for stagnation -- back into a growth cycle, the
United States has to engineer a quick turnaround. That can be done by fiscal policies that stem a further rise in long-term bond rates that would shut down borrowing for a new round of expansion.

To preempt a rise in rates that would derail recovery, the Bush
administration should seek to move forward the long-term tax cuts it proposed and that have already been approved by the U.S. Congress. At this point, even a further reduction in interest rates by the Federal Reserve Bank will not stimulate investment unless there is rising consumer demand. To create that demand, average consumers need more spending money in their pockets sooner rather than later.

The immediate effect of such a move would be to take the pressure off the long end of the bond markets where rates are rising because all new investment seems risky in the absence of surging demand.

If this were done, the U.S. economy would spin around much more quickly than even the most optimistic forecasts before Sept. 11. The rest of the world would follow in turn.

(c) 2001, Pacific Council/GEV. Distributed by Los Angeles Times
Syndicate International, a division of Tribune Media Services.
For immediate release (Distributed 11/19/01)

back to index