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Strategies & Market Trends : NetCurrents NTCS -- Ignore unavailable to you. Want to Upgrade?

To: Jeff Jordan who wrote (7250)	6/17/2001 6:13:56 PM
From: kendall harmon	Respond to of 8925

Good post, jeff; here are some further thoughts of interest from irwin stelzer in today's london times <<PRESIDENT George Bush's support of the death penalty brought out the protesters. His scuppering of the Kyoto protocol in favour of a more sensible approach to the reduction of greenhouse gases brought out the greens. And his insistence that he has a moral obligation to defend Americans from rogue-state missiles brought out the peaceniks. But these issues paled in importance in the minds of his European colleagues compared with the state of the American economy. Europe's politicians tried to satisfy their home constituencies by showing their disapproval of the death penalty (response: this is an American domestic matter and none of your business), the demise of Kyoto (response: politically and economically impossible for America, so get real and consider alternatives), and the birth of son-of-Star-Wars (response: America will go ahead with or without European support). But uppermost in their minds was whether America's economic slowdown would deepen and prove sufficiently long-lived to affect Europe's economies. Gone is talk of euroland being insulated from America by the strength of intra- European trade. Gone is the belief that the never-ending devaluation of the euro will stimulate exports sufficiently to offset the weakness in the American and Japanese economies. Gone, thanks to its stability pact, is euroland's ability to rely on a fiscal stimulus of the sort being administered by Britain's chancellor to improve the public services and not, incidentally, to give the economy a shot in the arm. And gone is any lingering faith in the European Central Bank's ability to manage fiscal policy so as to prevent Europe's rising inflation and snowballing economic slowdown from becoming a stagflationary meltdown. So all eyes are on America. And all hopes are that it will resume its role as the world's economic locomotive. This means that the world's politicians are once again looking to Alan Greenspan, Federal Reserve Board chairman, to continue the now-legendary manipulation of interest rates that has maintained America's decade-long prosperity - and its consumers' appetite for imported goods. Europe's politicians are hoping that Greenspan wins the debate now raging in America about the likely course of productivity. The spurt in productivity enabled the Fed to keep interest rates low while the economy grew and labour markets tightened. But recent figures show that productivity growth has slowed from the 4% annual rate that it achieved in the late 1990s, to about 1% now. What Greenspan has to decide is whether this pallid performance is merely a cyclical phenomenon caused by the slowdown in the nation's production of goods and services, or a reversion to the long-term trend rate of about 2%. If it is the latter, the Fed will have to take serious notice of the recent rise in long-term interest rates, an indicator that investors are guessing that inflation has returned as a force to be reckoned with. That would mean an end to the Fed's easing of interest rates - or even an increase or two to dampen inflationary expectations. This would certainly slow even more an economy that has already stopped growing. Greenspan is betting that the productivity growth will resume, making it possible for him to continue easing in order to cope with the current sluggishness. He has two reasons to be optimistic. First, the massive investment in capital equipment in the past 10 years has left America with a more efficient infrastructure that can produce goods and services at ever lower cost. Second, Greenspan is convinced that the slowdown in investment in efficiency-enhancing technologies will be temporary. Last month he told the Economics Club of New York: "There is still, in my judgment, ample evidence that we are experiencing only a pause in the investment in a broad set of innovations that has elevated the underlying growth rate in productivity." If Greenspan is right, the economy will be able to grow at a long-term rate of something like 4% without triggering inflation. This means he can continue to keep interest rates low even when the economy recovers. But the Fed chairman's view is not shared by all his colleagues on the monetary policy committee. Several of them are worried that rising unit labour costs and the leap in energy prices will lead to a rapid rise in inflation if interest rates are cut further. They argue, too, that the productivity growth rate of the 1990s was a one-off thing, unlikely to be repeated. Capital spending on the new equipment that makes workers more efficient has dried up. Without investment in that gear at the rate seen in the 1990s, when spending on plant and equipment grew at double-digit rates, productivity cannot grow at more than the 2% rate that has been the historical norm. Fortunately for those who believe that further interest-rate cuts are necessary to get the economy moving, Greenspan is likely to prevail. The dismal news contained in last week's review of the economy by the regional Federal Reserve banks makes it unlikely that the inflation hawks will risk throwing the economy into a deep recession by tightening monetary policy just yet. That's the good news for those who are looking for further interest-rate cuts to stimulate the economy. The bad news for business is that workers are likely to appropriate most of those gains, Arab oil sheikhs are likely to claim a portion, and consumers will carve out a piece of the pie in the form of continued discounts on everything from cars to computers. This would mean that even in a recovering economy, profits will remain slim. "Profitless growth" is the way one White House economist described to me what is in store for the American economy. It is not the best news for business and investors, but better than a recession by a long shot. >> sunday-times.co.uk