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To: Alex who wrote (28628)	2/20/1999 8:02:00 AM
From: goldsnow	Respond to of 116895

Different Opinion: Commodity swoon seen no harbinger of U.S. deflation 01:56 p.m Feb 19, 1999 Eastern By Alden Bentley NEW YORK, Feb 19 (Reuters) - Skidding commodity prices may raise the specter of global price declines but the United States is well insulated from ugly deflationary forces by its relentless, and lonely, economic expansion, economists said. As measured by the Bridge/Commodity Research Bureau Index of 17 commodities futures, prices for raw materials fell to their lowest levels in 23-1/2 years this week. Economists said the CRB's fall is not a reliable warning that prices for U.S. manufactured goods generally were on the cusp of a dangerous tailspin, though that risk remains. Instead, they consider the weakness in prices of many crops, livestock, metals and petroleum products as symptomatic of a glut amid overseas economic slowdowns. ''The CRB is probably a better measure of global demand than it is of inflation pressures. But obviously the two things are related,'' said Dana Johnson, research chief at First Chicago Capital Markets. ''The dollar is strong and global demand is weak. As a result commodities prices are tending to move lower,'' he said. The CRB index has shed about 5 percent so far this year and 20 percent in the last 12 months. Since Wednesday's low at 183.31 the index had inched back to 186.18 on Friday. The American economy barrelled into 1999 growing at a breakneck 3.9 percent annual rate, economists said. Among other factors, the tightest labour market in three decades helps prevent low raw materials prices from tipping inflation into deflation, an economic condition where prices keep falling as demand for goods dries up in expectation of even lower prices in the future, they said. ''Commodity prices are a tiny portion of the total costs of producing things,'' Johnson said. ''The cost of labour accounts for about two-thirds of the cost of producing things in the U.S. Even though commodity prices are down sharply, it's still a relatively minor offset to the ongoing uptrend in labour compensation,'' he said. Commodities have helped slow the rate of U.S. inflation, which economists said should allow the Federal Reserve to keep credit loose for now while America continues to enjoy booming growth. ''This is one of the reasons why the Fed cannot raise interest rates. Politically it would be very difficult for the Fed to raise interest rates when the inflation rate is down to almost zero and certainly negative at the wholesale level,'' said Sung Won Sohn, chief economist at Wells Fargo and Co. But most of the low-inflation benefit is probably behind. Rate of change is what matters to inflation, not absolute price levels, economists said. ''You're actually seeing the overall rate of inflation on a year-over-year basis starting to increase, because you are throwing out the big (commodity) price declines of a year ago and replacing it with more modest ones,'' said William Dudley, chief economist at Goldman Sachs and Co. U.S. Labour Department data released on Friday showed that from January 1998 to January 1999 unadjusted consumer prices rose 1.7 percent, up from 1.6 percent year-on-year in December. The consumer price index gained just 0.1 percent in the month of January. The decline in raw material costs could even be a net plus for gross domestic product, helping the trade balance even though the slump in commodities, like weak U.S. exports, is largely an outcome of recessions overseas. ''The U.S. is a big commodities importer,'' said Dudley. ''So for the U.S. the benefits of lower commodity growth are probably positive for growth rather than negative for growth. ''The terms of trade for the U.S. improve, so our trade accounts don't deteriorate as rapidly as they would if the price of foreign goods were doing the same things as the price as U.S. exports.'' On Friday, the Commerce Department said the U.S. trade deficit contracted to $13.79 billion in December from a downwardly-revised $15.26 billion gap in November. But the trade shortfall for all of 1998 was a record $168.59 billion. Copyright 1999 Reuters Limited.

To: Alex who wrote (28628)	2/20/1999 8:10:00 AM
From: goldsnow	Read Replies (1) \| Respond to of 116895

Business: The Economy Boosting global growth Asian storms have threatened to engulf the world Finance ministers from the seven leading industrial countries, the G7, are meeting in Bonn this weekend in a crucial attempt to avoid the world slipping into recession. With US economic growth set to slow this year, US Treasury Secretary Robert Rubin is keen to gain agreement for a package of measures to boost economic growth in Japan and Europe. "The balance of risks in the global economy has shifted, and that highlights the importance of sound, growth-oriented policies in all of the G7 countries," he said. The meeting will also try to agree rules for dealing with the next financial crisis. After two years of turmoil, France and Germany, with some support from Japan, will urge tighter regulation of global financial markets, including limits on hedge funds, and co-ordination on exchange rates. Since its launch, Europe's new single currency, the euro, has been falling against the dollar, while the yen has been subject to wild fluctuations in the past year. Oskar Lafontaine, the German finance minister, says he accepts that more economic convergence is required before currency target zones will work. "Without this, you cannot hold exchange rates stable," he said. But the European push for currency target zones has been weakened by dissenting views from Italy and the UK. "In the history of currencies, exchange rate restrictions have usually been counter-productive," said Italian Treasury Minister Carlo Ciampi. Meanwhile the Japanese, whose economy is the worst affected by the global recession, seem to have run out of options for stimulating growth. Japanese base rates have been cut to 0.15%, and two economic stimulus packages have worried the bond markets more than they have encouraged consumers. Trade tensions The disparity between the booming US economy and the weak growth in Europe and Asia has led to trade tensions. The US has been serving as the importer of last resort for the world economy, and as a result has a burgeoning trade deficit. "The international system cannot sustain indefinitely the large current account balances created by the disparities in growth and openness between the United States and its major trading partners," said Mr Rubin. The United States is already embroiled in increasingly bitter trade disputes with Europe over banana and beef exports, and with Japan over steel imports. Now a further fall in the Japanese currency since the move to cut interest rates further is exacerbating tensions. Last year alarm at the falling yen prompted the US Treasury to make a rare intervention in the currency market. International institutions Getting a grip on the wild fluctuations of the world's financial markets will be another top item on the agenda. Since last autumn, when the financial crisis threatened to bring down the global economy, some Western leaders have called for a restructuring of the "international financial architecture." Among the changes proposed have been: A redesigned International Monetary Fund - more open and moving to nip currency problems in the bud Better rules for regulating banks and stock markets in developing countries Increased lending to companies affected by the crisis Possible restrictions on capital inflows to some developing countries and on the hedge funds that lend to them Some economists suggest a more ambitious plan - a world financial authority, a central bank, that could intervene globally to prevent the next crisis. But with agreement proving difficult even on the more minor changes to the system, the impetus for a major rethink of the world financial system seems to be fading. History of co-ordination The history of the G7 group - made up of France, Germany, Italy, Japan, Canada, the US and the UK - demonstrates the difficulty in achieving international policy co-ordination. The G7 was set up in the 1970s at the initiative of the French to help solve the economic dislocation caused by the oil crisis throughout the industrialised world. It included an annual summit of world leaders as well as regular, more detailed meetings of finance ministers. Its finest moment was in the 1980s, when agreement was reached with the United States for a managed devaluation of the dollar, which was at an all-time high. The Plaza Accords (named for the swank hotel in New York where the agreement was negotiated) led to hopes that currency "target zones" could be permanently negotiated between the world's major currencies. The crisis engulfing Europe's exchange rate mechanism during the late 1980s and early 1990s and the deepening Japanese recession have made that impossible. Now, with Japan again encouraging a weak currency to boost its flagging economy, some sort of co-ordination could again be on the agenda. If nothing is done, some economists believe that the creation of the eurozone, while increasing EU currency stability, will make the fluctuations between the big three - the dollar, the yen, and the euro - more severe. news.bbc.co.uk