The end is nigh, and no fun
TIM COLEBATCH
Dr Doom is back. Gloomier than ever. Dr Al Wojnilower, the analyst who forecast the Wall Street crash in 1987, is making the same forecast now - except this time, he expects Wall Street to take the world economy down with it.
In Australia to address CS First Boston's annual economics conference yesterday, Dr Wojnilower said the Wall Street boom of the '90s had been a financial bubble. We were now past the crest of it, he warned, and the impact of the slide ahead would put the brakes on US and world growth for the next two years.
''Every period of prolonged easy money produces financial bubbles such as the present one,'' Dr Wojnilower said. ''They always last longer than you think is possible, but the end is not so much fun.''
Corporate profits in the US had peaked in the third quarter of 1997, he said, and had been falling since, despite growth of 3.5per cent.
''If growth falls to more like 1.5per cent, which I think it will - although the risk is on the down side rather than up - profits will fall more than that,'' he said. ''We have empty buildings in Bangkok and idle factories in Korea. We have both in Japan. We are starting to have empty factories in the US. US personal savings were negative in September. Five years ago, it was 5.5 per cent, but the deficit of the Government has been transferred to the household sector.''
The US merchandise trade deficit was now running at $A35 billion a month, he said. ''It will have an effect on the profitability of US companies. It will have a damaging effect on the rest of the world.''
The worst of the crisis would probably be felt in 2000, but the best hope was that Wall Street might hold out until Japan and Asia had begun to recover.
Dr Wojnilower, senior economic adviser to the private investment firm Monitor-Clipper Partners and vice-chairman of Craig Drill Capital, is used to being a lone voice.
''I have solid credentials as an alarmist on these matters,'' he said. ''I think all human beings have a narcotic attraction to gambling, and those who have that attraction and want to be reasonably respectable do it on financial markets.
''I may sound facetious, but I don't think you can understand financial markets unless you understand that that is their structure. They are casinos.''
Dr Wojnilower blamed the chairman of the Federal Reserve, Dr Alan Greenspan, for not bursting the bubble by raising rates in 1996 and 1997, before it was too late. He said the Fed had been sidetracked by a single-minded focus on inflation in the real economy, failing to recognise the dangers of asset price inflation. Even now, he said, ''US monetary policy is trying to perpetuate the bubble''.
By contrast, he praised Australia's performance in the crisis. ''Through a combination of luck and good management, you really have dealt with it exceptionally well. You have a Reserve Bank management, which is second to none in the world, in my opinion.''
But Dr Doom, as Wall Street christened him for his gloomy predictions, said Japanese monetary policy had contributed to the problem by cutting rates as low as 0.5per cent, which then allowed the hedge funds and mainstream financial institutions to snap up cheap money to invest in the US.
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