New World Disorder
TIME's Board of Economists sees the U.S. retrenching and Europe resurgent — and oil, currency and stock volatility all around
BY PAT REGNIER
Is it Europe's turn to run the world? The prevailing mood at this year's World Economic Forum meeting in Davos was that the United States — once the home of irrational exuberance and dotcom mania — is just so 20th century. Yet the five members of Time's Board of Economists, which convened in the Swiss ski resort last Monday, weren't so unanimous. No one disputed that the U.S. economy is slowing and could even grind toward a recession, though most agreed that a recovery would come by late this year. The hottest debate was over Europe's ability to isolate itself from the woes of the U.S.
The Continental consensus these days is that having avoided America's grasshopper excesses, the thrifty ants on the eastern side of the Atlantic will continue to thrive. Yet Europe and the U.S. still share deep financial ties. That morning's newspapers offered a reminder of the connections between the two economies: the German-American amalgam DaimlerChrysler announced it was cutting 26,000 jobs.
None of the economists saw much good news coming out of Japan, which is still burdened both by its debt and by the change-resistant leadership of the Liberal Democratic Party. As for the emerging markets, the outlook still very much depends on just how bad things get for the U.S. economy, and whether the new Bush administration takes a smart approach to financial crises beyond its borders. The bottom line: uncertainty is the rule around the globe. The markets for everything — from equity to oil to currency to labor — are likely to remain volatile.
Volatility can be wrenching, but it is important to remember that in the U.S. it has also been the lifeblood of economic growth. Board member Robert Hormats, vice chairman at Goldman Sachs International, reached back to the 19th century to make the point. "In the 1880s, the U.S. built 70,000 miles of rail," he said. "In the 1890s, 40,000 of those 70,000 miles went bankrupt." Yet that infrastructure powered growth in the early 20th century. Likewise, the beating many tech stocks took last year is only half the story. Dell Computer's shares may be down, but the company's PCs are still sitting on millions of desks in corporate America, helping businesses sell more while spending less.
That productivity boost allowed the U.S. to grow at phenomenal rates in recent years without incurring dreaded inflation. It also helped attract hundreds of billions of overseas dollars into the U.S., noted Kenneth Courtis, Tokyo-based vice chairman for Goldman Sachs Asia. And there may be more coming. "I don't think that all of a sudden the factors that made the U.S. a huge magnet for investment have disappeared," said Courtis, who argued the dollar could prove stronger against the euro than most analysts expect. But his colleague Hormats was less sanguine about overseas investment, pointing out that "if the foreign capital decides it's not so willing to come in, then we have a currency problem."
Another worry: it's getting hard for weaker American companies to borrow. Courtis held up what he called a "frightening" chart depicting bond yields. In early January corporate junk bonds yielded nine percentage points more than a credit-safe 10-year Treasury. (In other words, lenders demanded that much more from risky borrowers.) That "spread" is higher than it has been since the U.S. banking crisis a decade ago.
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