City & Business: Washington exerts a diminishing influence
Sunday 21 June 1998
Just as Pippa was telling reporters she had invited to lunch at the Reform Club that "the US will not intervene to prop up the yen", a porter appeared at the door. Urgent phone call for Ivan Ritossa, the porter whispered. Ivan was Pippa's boss - head of foreign exchange trading at Bankers Trust. Ivan excused himself, then reappeared looking pale. "The US has just intervened to prop up the yen", he announced. "I'm sorry, you'll have to excuse me."
Pippa saw the lunch through without her boss and despite her embarrassment. She was right to do so. Given the volatility of markets, economic forecasting has never been more perilous. The best anyone can do is make a transparent series of deductions, then put them out there knowing that the calculations made by traders, government officials, and central bankers on which they rest will change by the hour.
It is, indeed, hard to understand what the key market actors were doing after the fact. The tug-of-war between rival nations on the one hand and governments and markets on the other has become such a game of bluff that candour, even retrospectively, does not pay.
Nevertheless, this much seems clear. We began last week with the carefully- hedged declaration by US Treasury Secretary Robert Rubin that the US did not intend to intervene to prop up the falling yen. Taking this declaration as a cue, currency traders went short on the Japanese currency and long the greenback. This drove the yen down toward the "red alert" zone of 150 to the dollar.
On Tuesday, President Clinton met with his economics team to decide what to do. On Wednesday, the US zapped currency traders, buying at least $2bn worth of yen. This stopped the yen's fall in its tracks and bucked up stock markets - which had looked distinctly jittery as investors, observing the yen in free fall, contemplated the unravelling of the world economy.
On Thursday, the markets rebounded. The US would not have intervened to prop up the yen, they reasoned, unless it had won big concessions from Japan. These concessions had to include serious measures to get Japanese consumers spending again to mitigate the worst recession in Japan since the Second World War.
THE concessions also had to include a plan to clean out $560bn (pounds 335bn) of bad loans on the books of Japan's banks - first, by setting up a government agency on to which the banks could offload these loans, and second, by allowing the weakest of the banks to fail.
If Washington's carrot-and-stick routine works, Tokyo just might stimulate its economy and give the Japanese banks - whose problems are a terrible drag - a new start. The problem is that the odds on Washington's carrot- and-stick routine working are not good. The essence of the routine is to make Japan more like America. Every fibre in Japanese culture is bound to resist this.
Pippa Malmgren reported that she found the Japanese authorities intent on digging their way out of recession in their own way. The Japanese, she said, do not see the urgency we in the West take as read. No matter how much Japan stimulates its economy, Andrew Smithers of the investment advisory group Smithers, adds, it is not going to be enough. Japan has a savings mountain, he says, which nothing any Washington official or Keynes himself ever thought of is going to melt.
Still, Washington's initiative calmed the markets. In the language of the pundits, it has bought time. The betting now is that we will not see another such round of currency instability until after President Clinton's visit to China this week. And probably not until after the Japanese elections on 12 July. And maybe not until after the mid-term Congressional elections in the US in November.
It all depends on how long the markets believe Washington's initiative is moving events in the right direction. The basic economic facts will chip away at this confidence. Not only is Japan in recession, but China faces huge problems of disguised unemployment, the Asian tigers remain basket cases, Russia teeters on the brink of ungovernability - and the US stock market looks too high.
Trevor Greetham, Merrill Lynch's global strategist in London, forsees a "profit recession" in the US - a decline in the level of profits to be reported by US companies - which will drag at the Dow. Trevor likes bonds.
TWO years ago at lunch at the New York Fed, I listened to US central bankers fret about the soaring Dow. They remain worried today, but have stopped saying so publicly for fear that their warnings will go unheeded and hurt their credibility.
It is possible Washington can let the air out of the US stock market with fewer repercussions in the real economy than the Japanese government did, as the Nikkei slid from 40,000 in 1991 to 15,268 on Friday. But I don't see why. Today Tokyo stands naked and ashamed before the world. The imbalances in the Japanese economy - the shortcomings in Japanese culture - are on display in the country's diminished state. But who is to say the US is not approaching such a reckoning? Who doubts there are giant imbalances in the US economy and culture?
The fact that Japan stands humbled today does not necessarily mean the US will stand humbled tomorrow. Many still believe that the US stock market is not overvalued. Others say that even if the Dow is heading for a fall, the Clinton administration has demonstrated skills necessary to ride out the storm.
The bears have been wrong for so long - three years if you count back to the Mexican peso crisis; 16 if you count back to the beginning of the bull market - that the burden lies on them to prove they are not crying wolf yet again.
But with each wrench in global markets like the one we stumbled through last week, the margin for action on the part of government officials seems to shrink. You have to wonder: Is Washington whistling in the dark - and, if so, for how long?
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