Asia Times: US economy: Not dead by a long shot


	September 18, 2001	atimes.com

Editorials

US economy: Not dead by a long shot

Asked in an interview on NBC's "Meet the Press" if the United States was now in both a war and a recession, US Vice President Dick Cheney said on Sunday, "Quite possibly. We clearly have a war against terrorism and we don't know yet what the third quarter is going to be like" in the economy. But he also said the US economy was "strong" and that he expected it to "rebound later this year".

Emphasis by the US vice president on the strength of the US economy might be regarded - and dismissed by some - as a chins-up message in the face of extreme adversity, based more on political necessity and raison d'etat than on candid assessment of US and world economic prospects precedent to and in consequence of last week's terrorist attacks on New York and Washington. Analysts have pointed out that confidence in the strength and resilience of the US economy and the invincibility of the US dollar had been severely damaged prior to September 11, that the successful attacks that day on the nerve center of world capitalism had damaged confidence further, and that under such circumstances US consumers who have prevented a lapse into recession to date will hardly be encouraged to go on a spending spree.

And there are more immediate concerns: how will US and world stock markets react over this coming week? How will the global financial system withstand the strain? Individual consumers and investors - whether in the US or elsewhere - can hardly be expected to help hold up the economy if the financial world comes crashing down around them.

Our considered view is that the panic reactions many predict and are bracing for will not come to pass. Last week the US Federal Reserve pumped $118 billion into the financial system and made swaps to obtain $90 billion from the European Central Bank and the British and Canadian central banks. The ECB injected 69 billion euros on Wednesday and 40.5 billion euros on Thursday. Immediately after the attacks, the Bank of Japan injected nearly $17 billion. Adequate defenses against panic withdrawal of funds from banking systems and inability of counterparties (buyers and sellers of securities) to meet their commitments have thus been erected. Initial stock market slumps should remain contained in the 5 percent range. As one New York trader put it, "No one has ever made money on panic selling."

The key issue is what to expect beyond the next several days. Regarding that, we are confident and share Dick Cheney's confidence in the early recovery potential of the US economy. And regarding equity markets, at least some New York and London traders will recall and heed the advice of Nathan Meyer Rothschild, founder of the London branch of the family, during the Napoleonic wars: "Buy to the sound of cannons and sell to the sound of trumpets [of peace]."

Economies are not things on their own. They are the economies of nation states, and their fortunes - though often the reverse may appear to be the case - ultimately rest with the policies and fates of those nations. Anger, outrage and cold determination have galvanized US national resolve and have established a clarity in national policy and definition of national interest that had been absent for over a decade. Over 5,000 people are dead. Clintonesque feel-good "post-Cold War era", "end-of-history" illusions are gone - and not in the US alone.

After initial shock reactions and uncertainties, Americans will get back to work and the economy, partly on a war-footing, will perform. Talk of worries about a re-emerging budget deficit and the so-called Social Security lockbox will be set aside. Funds well beyond the US$40 billion already approved will be made available to cope with the aftermath of the September 11 catastrophe, including aid to the airline industry and other industries directly affected. President Bush's energy policy proposals to make the US less dependent on foreign supplies will be implemented - at very substantial amounts of combined public and private investment. Military spending will increase significantly and Defense Secretary Rumsfeld will not have to beg Congress for funds. More tax relief, possibly in the form of a capital gains tax cut, will be forthcoming, as will further easing of monetary policy. And perhaps most encouraging, the US rate of new business formation which had dropped to below 400,000 per year in 2000, has already picked up dramatically this year, leading the Internal Revenue Service to predict the creation of nearly a million new enterprises in 2001 - with the obvious consequences for both capital and consumer spending.

On the back of economic recovery, dollar-denominated financial assets will stage a comeback. Bonds will lead the resurgence, to be followed later by stocks as downsizing and restructuring by large corporations is evidenced in profit growth and new businesses seek to raise equity capital and present new buying opportunities.

Is this too rosy a picture? We don't think so. Our concerns regarding the global economy attach not to a continuing or even deepening US slump, but to the fear that the economies of the EU, of Japan, and of other Asian nations will - initially at least - not only not partake of US resurgence, but - absent any comparable drivers - sink deeper. Such fate is avoidable if pessimism is not permitted to turn into self-fulfilling prophecy and the political will to execute way overdue structural reforms is mustered at long last.

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