The limits to monetarism

Louis Proyect lnp3 at
Sun Mar 18 09:05:30 MST 2001

[This is a passage from an interesting NY Times op-ed piece that explains
why lowering interest rates is no elixir to the American stock market woes.
As Garten, dean of the Yale School of Management, explains, if the price of
a T-Bill comes down, Japanese investors might take their money elsewhere.
In other words, Greenspan is caught between a rock and hard place. What the
article does not discuss, but what I have been running across constantly in
my readings on airline deregulation, is that such US corporations ran into
a big decline in profits in the 1990s. Eventually the stock market caught
up with the profit crunch, just as it did when Japanese investors figured
out that Tokyo real estate was as overpriced as]

NY Times Op-Ed, March 18, 2001

The American Risk in Japan


NEW HAVEN — We have often seen how the fate of the American economy cannot
be divorced from global markets, and how even a spark abroad can create a
fire at home. In 1987, for example, the stock market crash was precipitated
in part by a dispute between Washington and Bonn over interest rates and
trade. In 1998, a financial crisis that began in Thailand ultimately spread
until it forced a dramatic bailout of one of America's largest hedge funds
— a rescue that prevented an implosion of many American banks. Now Japan is
the trouble spot that ought to keep us up at night. . .

Japanese entities still own some $350 billion of Treasuries, about 25
percent of all such holdings outside of the United States, not to mention
hundreds of billions of other marketable bonds and stocks. Japanese firms
own some $150 billion in direct investments in America, more than those
held by any other foreign country except for the United Kingdom. And
Japanese companies employ over 550,000 Americans.

A Japanese sell-off of American assets could mean more downward pressure on
our softening economy — more surplus property, more layoffs. It could mean
that the Japanese would exchange dollars for yen, weakening the dollar,
which in turn would lead to increases in the price of imports that are now
crucial to our economy. Rising prices in a no-growth economy — stagflation
— may be more possible than we think.

Everyone wants and expects the Federal Reserve to bail out the economy, not
only by lowering interest rates on Tuesday when the Open Market Committee
meets, but also by lowering rates over the next several months. But if
Japanese investors sell off their American assets and cause the dollar to
sink, the Fed could face an agonizing dilemma. On the one hand, cutting
interest rates could help revitalize the economy and the stock market. But
it could also further weaken the dollar by making dollar- based returns
less attractive, thereby discouraging European and Latin American investors
from continuing to invest in American securities.

We have seen how herd-like markets can run wild, and were there to be a
precipitous decline of the dollar, the Fed would have to consider holding
rates steady or even temporarily raising them. This is not a position that
Alan Greenspan would want to be in. As consumers, investors, employers and
employees, neither would we.

Full article at:

Louis Proyect
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