The article I selected this week came out of the archives at Fortune Magazine’s web site. Entitled “Why the Global Storm Will Zap the U.S. Economy” by Jim Rohwer, the article is about 1 ½ years old. However, it speaks to a coming economic crash which seemed a particularly appropriate topic after Friday’s huge sell-off in the U.S. markets. What’s more, since the article touches on dollarization, commodity pricing, the IMF, the Euro, capital flows, and deflation, it seems to be a grand mix of topics given this week’s text assignment!
The bottom line for this article is the author’s belief that the “global deflationary wave let loose by the Asian financial crisis” of 1997/1998 will “weaken Japan even further, demolish Russia, shake Latin America, and threaten Europe and the United States.” With that said, while many might jump to the conclusion that this is a ‘gloom and doom’ story, Rohwer goes on to prophecy that it is instead a positive long term situation if patience can but win out.
At the root of the pending negative boom that is only now being lowered around the globe is the “imposition of ruthless American standards” of “technological and corporate efficiency that is forcing almost everybody … to conform or die.” This imposition, according to Rohwer is a deflationary force in the early stages but it will by definition, “after the coming crash” lead to a “great world [positive] boom as the standards pioneered by the U.S. become those by which all companies and economies are judged.”
Rohwer’s reason for why something that is currently a U.S. benefit will become a U.S. problem can be summarized in two broad points.
· The first is his view that “nobody has given a very good explanation for financial contagion--why the collapse of one country's markets should send the markets of other, mostly unrelated, economies down as well—but there is no doubt the process exists. The world has already seen an awful lot of this contagion, and there is no reason why it should suddenly stop at the threshold of the rich West.” Thus, the U.S. markets will suffer what the Asian nations have been dealing with already though on a delayed time reaction of up to two years.
· Secondly, Rohwer points out (what the markets proclaimed on Friday the 14th) that such contagion driven collapse will “find a nice, ripe host in the U.S. economy and its overvalued stock markets. One consequence of our seemingly unending boom in the economy and the stock market is that companies have made massive capital investments based on little more than the expectation of an unending boom in the economy and the stock market.”
What’s more, Rohwer points out that “American households, never known for their thrift, are now saving virtually nothing: They're counting on their mutual funds, which these days contain more of America's financial assets than the whole banking system. The effect of a Wall Street slump on household wealth and consumption would be enormous.” Such a slump, while nasty enough a shock to the system in its own right, could be (almost certainly) exaggerated by governmental action. (My greatest personal fear by the way!)
The way out of this mess, is the process Rohwer defines as dollarization whereby the rest of the world accepts and then implements increasing “technological and corporate efficiency” (as the U.S. has been doing). This process will be kicked off by increasingly freer flowing capital and a “bipolar currency world” where the “American pole will have a lot more magnetic attraction than the European” one.
On a personal level, such a scenario will obviously impact my immediate line of work as Sony will be forced to contend with the impact of any such world-wide deflationary situation. At the same time, this might not be for the worst as I’m in a field that should be contributing heavily to the anticipated “transmission of American standards of efficiency to the rest of the world.” Of course, the new economy part of that contribution will see its valuation and hence flexibility whacked if the author is correct, but even that might create opportunity for a company such as Sony if it possesses the boldness to move forward and seize the moment. Additionally, a collapse in wealth-effect spending could slow demand for Sony products which are fundamentally not required elements of living in spite of our marketing preferences!
However, on a truly personal level, changes in markets and the type of deflationary pressures I’m apt to deal with as an individual should be pressures I can ride out. With no extraordinary debt and adequate (I hope) time until retirement, I would expect to muddle through Rohwer’s storm to land safely on the other side. I may think twice about investment strategies, perhaps favoring Europe a bit more as Rohwer figures the “Euro project, backed by great reserves of wealth, may allow it to preserve a regime of social protection and relative economic inefficiency that nobody else will be able to afford.” But of course, since expectations and realities rarely have a habit of matching, I really don’t take much solace in my own conclusion. In actuality, I must be content in knowing that only time will tell of the impact of Rohwer’s prediction.
Given the volatility in the markets, the seemingly exorbitant valuations that the “new economy” ventures are seeing, and the debt levels currently being carried, I’m left wondering if Rohwer’s article is an accurate prediction of our current economic game in the 7th inning. If so, I’m all for taking the stretch and then anxiously looking forward to the glorious ending he predicts. A time when “the world's economic efficiency and wealth-producing capacity are radically upgraded” and a time when “the world is going to be a lot better off for it.”
Rohwer, J. Why the global storm will zap the U.S. economy. Fortune, 09/28/98.
Pugel, T. A., & Lindert, P. H. (2000). International Economics. New York: Irwin McGraw-Hill.