This Clinton boomed has been based upon a credit debt boom and a Federal Reserve bubble monetary policy of opening up the money supply to encourage more wild debt. This legacy will end in disaster and the next President will be blamed for it - if Bush or Gore create a budget deficit we are in for a disaster. That's why the bond markets are looking unfavorable today.
markets.ft.com
From boom to trust
By Barry Riley
Published: November 3 2000 21:00GMT | Last Updated: November 3 2000 22:31GMT
Next Tuesday US citizens are invited to vote for their new president. It looks as though half will not bother and the rest will be split down the middle. To foreigners this apathy and indecision appears rather strange, especially as it has been a rule in the past that a strong US economy has provided a reliable re-election ticket for the exiting president's party. The economy might have been expected to deliver stronger momentum for Al Gore.
Obviously complex questions of politics and personalities are involved, that I will not go into here. But, as Bill Clinton eases into retirement, it is time to examine the extraordinary economic and financial achievements of his years in office. If the US people refuse to reward this success by confirming his chosen successor, is it because the miracle is perceived to be flawed, or because it is not seen as attributable to the Clinton administration?
The Clinton years began in early 1993 with the US economy still only just pulling out of a recession, and there was a hesitation in 1995 after interest rates rose. Bill Clinton's second term since 1997, however, has seen an all-out boom, with real economic growth averaging 4.5 per cent a year. Japan, so menacing to the US in the 1980s, has been buried as an economic rival and the dollar once again dominates the global economy. The US unemployment rate has sunk from 7.3 to 3.9 per cent in eight years and, even more impressively, the number of jobs has climbed from 110m to 132m. Inflation, though now rising towards 4 per cent, has remained subdued despite labour market pressures.
The financial markets have achieved enormous strength. Clinton's average annual S&P 500 annual growth has been 16 per cent while the yield on the 30-year Treasury bond has declined from 7.4 per cent to 5.7 per cent. The budget has shifted from a serious deficit to a massive surplus.
What are the reasons for the economic upsurge? Officially, the US has benefited from the encouragement of innovation, from open markets and from low taxation. But there are darker aspects. Monetary growth has accelerated in the past few years and outstanding consumer credit has risen by 90 per cent during Clinton's presidency.
Strong domestic demand has sucked in floods of imports that have suppressed inflation but have expanded the current account deficit from $82bn in 1983 to probably more than $400bn this year. Forecasts range up to $500bn for 2001. This alarming deterioration might have been expected to trigger a dollar crisis that would have ended the boom, but instead foreign capital has poured in, much of it coming from continental Europe to the great embarrassment of the sponsors of the euro.
Clinton is handing on a still-booming US economy, but there is much trouble around the globe. A new financial crisis is developing in Asia, and Latin America has traditional problems, now seen most seriously in Argentina. The US has failed to address its structural oil problem: it is a big consumer and importer, but has neglected to secure long-term supplies at reliable prices. As for the euro, the US has been hypocritical in agreeing to join the support operation in September while also continuing a strong dollar policy.
Financial instability has become chronic. After the international crises caused by the Russian default and the collapse of Long-Term Capital Management in 1998, which were patched over by IMF- and US-led rescue operations, extreme volatility has been transferred to the US domestic stock markets, especially Nasdaq, which has crashed by more than 30 per cent since March.
Perhaps the most threatening domestic financial development has been the deterioration of the credit markets. Looking back to the 1991 recession, the yield spread of high-yield corporate bonds over US Treasuries reached 10 percentage points. In the calm of the mid-1990s that spread narrowed to between 3 and 4 per cent but now it has widened out again to 7 per cent, and bond market liquidity has dried up as anxious investors attempt to avoid an onslaught from dodgy telecoms bonds.
Ironically, one of Clinton's final financial measures is a proposal to allow pension funds to invest in low-grade bonds. This can be viewed as a technical amendment, but also as a symbol of the increase in asset price volatility and credit risk that has been the tell-tale counterpart of the remarkable surge of economic growth. Hence the unwanted switch from US Treasuries to sub-investment grade bonds.
Has there really been an economic miracle? Or has it been a credit-based spree, rather like the Japanese phenomenon of the 1980s that fizzled out as asset prices began to tumble and it became clear that companies had overinvested in uneconomic productive capacity?
A tantalising question during the past couple of years has been whether the boom could be stretched out to November 2000. The relationship with Alan Greenspan, chairman of the semi-independent US Federal Reserve, has been crucial here. The Fed stoked up liquidity a year ago when the millennium computer bug threatened - but did not deliver - trouble. The miscalculation caused the stock market to overheat but Greenspan got the reward of a new four-year term.
The Fed has swallowed some debatable so-called "hedonic" or quality-related adjustments to US output and productivity statistics, and has focused on what is described as "core" inflation that happens to be conveniently weaker than wider measures that include energy and housing costs.
In return, the government has maintained a very tight fiscal stance, offsetting some of the inflationary pressures. If the next president cuts taxes and hoists spending he could quickly come into conflict with the Fed.
In the event, the US economy has begun to slow down only moderately, but enough to frighten growth-obsessed investors in the technology sectors, and sufficiently to aggravate anxiety in the credit markets. The stock market has been extremely volatile in the run-up to the election but old economy stocks have, roughly, gained what tech speculations have lost.
Clinton, starting from a weak base, has given the US economy a free rein. The response has been amazing. But, like most economic booms, it has been unpredictable and divisive, which may help to explain why so many US voters are unenthusiastic. The US economy is also remarkably unbalanced. But you have to admire the timing. |
