LONDON — The dizzying decline in the value of high-tech stocks over the past couple of months has led to a welcome silence from the snake oil salesmen, who have spent the past five years insisting that share prices only go up and that the good times are forever.
It has been a while since we heard the phrase "new paradigm," and there is soul searching aplenty going on as thoughts turn to how the legacy of the binge years — an exploding current account deficit — will be financed when the dollar follows the NASDAQ downward. Some economists see the looming financial problems in the United States as the final leg of the Asian crisis that started in Thailand in the summer of 1997.
But that assumes that the Asian crisis is over, which is far from the truth. Most of the economies laid low in 1997 and 1998 have bounced back impressively, while those that escaped the full force of the financial hurricane have carried on growing impressively.
In part, this was due to currency depreciation, but a big part of the story is the technology boom in the United States which has sucked in imports from southeast and east Asia. With demand booming for its computer chips, South Korean exports were up almost 25 percent in 1999 and the first half of 2000. But if the American technology boom fizzles, there is a real risk of a second Asian downturn.
When Uncle Sam sneezes, the rest of the world catches a cold — and this time the United States may drag the rest of the world down with it.
Bill Martin, an economist at Phillips & Drew, says the United States has iexperienced a high-tech boom since the mid-'90s, with fast growth in the volume of IT (information technology) investment spending — computers, software and communication networks. Martin says two factors help explain this surge: the rise in business output growth, which pushed up demand for IT kits; and the rapid rate of decline in the relative price of IT equipment. Of the two, the fall in IT relative prices has been the more important.
This investment surge prompted a re-rating of technology stocks. In 1995, analysts predicted that the earnings of technology firms would rise by 16 percent. These expectations have been revised sharply upward to 27 percent.
But the U.S. economy is saturated with IT equipment, and demand has started to wane.
Potentially the biggest problem area looks to be Japan. Although it is now more than a decade since the puncturing of the stock market bubble, lasting recovery still seems some way off. Bankruptcies are running at record levels, putting intense pressure on the banking and life insurance sectors.
The stock market looks fragile, there is little scope for lower rates and the limit has been reached for expansionary fiscal policy. Japan could turn nasty, with knock-on effects for the whole region.
What Asia needs is lower rates in the United States, and the sooner the better. Given the sheer scale of global overproduction, it is vital that the U.S.'s seemingly insatiable appetite for foreign goods remains strong. As Martin has shown, it seems unlikely that the investment boom in the United States can continue at the rate seen over the past five years, but a softish landing would at least buy a bit more time for Asia.
The great hope for Wall Street's dwindling band of bulls is that Federal Reserve chief Alan Greenspan will once again ride to the rescue. But while the next move in U.S. interest rates will certainly be down, the Fed is in a quandary.
It bailed out the stock market in 1998, but to do so again would give investors the security that they can act with reckless stupidity safe in the knowledge that Greenspan will never let them suffer unduly.
Should these speculative flows of hot money into the United States be reversed, Greenspan will have to keep rates high and deflate the economy to keep the lid on prices and finance the trade deficit. This is what happened to Asia when boom turned to bust in 1997. It will come as no comfort to them if the United States gets a dose of Asian flu.
Distributed by Scripps Howard News Service