The Sky's The Limit

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Laura D'Andrea Tyson, dean of the Haas School of Business at the University of California, Berkeley, and chairman of the White House Council of Economic Advisers during the first Clinton Administration, pointed out that the Internet is starting to roll through financial industries as it has through American retailing. Big brokerage houses like Morgan Stanley Dean Witter and Merrill Lynch are launching online services against burgeoning upstarts like Charles Schwab and E*Trade--just as Internet-based brokers start to offer subscribers such customized services as video interaction with financial advisers. The losers? Maybe neither. "These new approaches aren't displacing anyone," said Tyson, "but allowing more of this to occur than could otherwise."

That's the idea, anyway--a new economy that adds new value. It has worked in spades in the U.S., which last week marked its longest period of expansion in history, with unemployment figures (currently 4%) that most European countries can only envy. Hormats predicted more of the same this year. He gave a share of the credit to the Clinton Administration's drive to pare the U.S. budget deficit, which has succeeded beyond anyone's wildest fantasies. Among other things, he noted, the fiscal achievement turned what government economists in the mid-1990s projected would be a $400 billion deficit in fiscal 1999 into a $120 billion surplus. At the same time, individual stock-market investors are behaving almost like professional venture capitalists, ignoring short-term profits--or the lack of them--in favor of long-term gains. "There's been a real strengthening of equity culture," he said.

Unfortunately, another effect of the boom has been to raise consumer debt and the U.S. balance-of-payments deficit to alarming levels. These have added to the inflation concerns of Federal Reserve Chairman Alan Greenspan, who on Feb. 2 jacked up interest rates another quarter of a percentage point. Further tightening could spook an increasingly jittery stock market, and the pressure for a bigger boost remains strong. Much of America's current wealth could evaporate with stunning speed. Despite big average increases in disposable income, Tyson pointed out, "savings rates are still declining, and no one knows what to do about that in any country."

Those problems could be further compounded if investors decide they are holding too many U.S. dollars, a risk that grows with the current account deficit. Right now the difference is made up by foreign investment funds flowing into the U.S. "The U.S. is dependent on that money," said Hormats. Inflation fears--or perceived better opportunities elsewhere--could "fuel a risk," he added, of foreign investors pulling out.