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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: Enigma who wrote (18134)	9/9/1998 3:52:00 AM
From: Alex	Read Replies (1) \| Respond to of 116895

Not so quickly to the rescue Wednesday, September 9, 1998 By Peter Cook Imagine the following: With stock markets everywhere in the middle of a selloff, with Latin America catching the Russian disease, with international commodity prices in the cellar, the Federal Reserve Board meets in Washington to raise interest rates. An ultralow U.S. unemployment rate and accelerating wage claims warrant it, say the Fed's governors blandly. And it is their duty to make policy for the United States and not concern themselves overmuch with a global economy in distress. The Fed is, in fact, to meet to consider what to do about U.S. rates on Sept. 29, three weeks from now. It is a measure of how much has changed since it last met on July 1 that the hints that Fed chairman Alan Greenspan is now making are about easing rates, not the tightening the stock market has been fearing for months. Mr. Greenspan said over the weekend that the United States could not survive as an oasis of prosperity when, around it, economies crumble (a thought that has been Wall Street's greater worry for some weeks). That statement -- say nervous market players who are getting poorer by the minute and need to be reassured -- means (a) he is alive to the threat of a global slowdown and (b) a market-saving U.S. rate cut is imminent. The problem with this analysis is that while item (a) is clear and correct, item (b) is anything but. For example, no sooner had Mr. Greenspan mentioned the vulnerability of the U.S. economy than commentators started to announce the end of a period of protracted strength for the U.S. dollar, and the currency fell against the Japanese yen and the German mark. If that fall continues, Mr. Greenspan is going to have to take account of both its stimulative effect on U.S. export orders and output, and its inflationary impact on import prices. Since he is dealing with an economy that is in fairly robust health, a falling dollar may be all the extra stimulus that is needed. In which case, rates would not be cut. And the markets would be massively disappointed. At the same time (and this is the celebrated "on the other hand" of the two-handed economist), Mr. Greenspan knows he cannot disappoint the stock market too much since a still bigger Wall Street crash would hit U.S. consumption and precipitate a downturn of which he would be the acknowledged author. What to do? The answers are not easy. Nor do they stop at Mr. Greenspan. The Bank of Canada has just raised rates, a policy that looks singularly inappropriate in the context of the new, weaker world economy. Britain has raised rates so high that it is now facing an instant loss of confidence in the pound; after all, if the world is moving to lower rates, the country with the most scope to lower them is Tony Blair's Britain. Meanwhile in Europe, or Euroland, they boast that the 11 currencies that will merge to form one on Jan. 1 have been amazingly well protected. When money troubles hit in Scandinavia, down went the Norwegian, Swedish and Danish currencies, all of them non-joiners of the euro, while the Finnish markka -- a currency often devalued in the past but now a joiner -- stayed solidly where it was. The conclusion to be drawn from Europe's mood of the moment is that nothing need be done. Not only is its money less vulnerable, but its stock markets have held up better. "While most of the world's economies go into freefall, there is one haven of calm, Euroland," trumpeted this week's The European. So well had Europe insulated itself that its stock markets stood to benefit from global money in search of a safer haven, the weekly newspaper said. Gerald Corrigan, former president of the New York Fed and now with Goldman Sachs, has said that the flip side of the irrational exuberance (that Mr. Greenspan accused Wall Street of before) is "an irrational rush to the doors." But Mr. Greenspan never did more than warn about the dangers of too much exuberance. And it is now players in the stock market who are in a mood to grasp at straws, not him, that are interpreting his "oasis of prosperity" remark as meaning a certain cut in interest rates. If there is an irrational rush to the doors, then, as a central banker, he must act. But it is pretty hard to judge when that is happening and, if it is, what can usefully be done. The point is that neither in Washington nor elsewhere is there a desire to lower rates and ease policy when the stock market has done little more than blow off the froth at the top of the mug and economic turbulence is a condition that is happening somewhere else. Mr. Greenspan may be an internationalist -- but he cannot make policy for Latin America, let alone Russia. And stocks have been riding so high that a 20-per-cent decline still leaves many markets overvalued by any past standard. The result is that a bear market in stocks is not going to melt the hearts of central bankers unless and until they see that it is having a negative effect on the economy they are in charge of. In the United States, that may happen sooner than in Europe. But it is not the case now and there are no clear predictions when it might be. Peter Cook can be reached by E-mail at pcook@globeandmail.ca theglobeandmail.com