Country singer Kris Kristofferson did not have fallen CEOs and other investment bankers in mind when he sang about the man who “Once … had a future full of money, love, and dreams, which he spent like they was goin’ out of style,” but it is an apt description of many shell-shocked bankers and investors.
They have reason to worry. Oil finally hit $100 per barrel, sending share prices tumbling and gold prices soaring, in anticipation of renewed inflation. Rising food and gasoline prices are reducing consumer discretionary-spending power to a mere shadow of its former self. The unemployment rate last month soared from 4.7 to 5 percent.
And the manufacturing sector is slowing.
Whether all of this will produce a recession in 2008 remains less than certain. For one thing, the White House might step in with a fiscal stimulus package that includes allowing faster write-offs of business investment or, if Congress will go along, lowering the corporate tax rate.
For another, we can’t be certain whether the Federal Reserve, now more worried that the slowdown might morph into a recession, will accelerate the pace of its interest rate cuts.
But there are some things we do know. The structure of the financial services industry is changing. Many banks need to rebuild their balance sheets by attracting equity capital, and sovereign wealth funds of oil-producing and other exporting nations need someplace to put their cash to work. The result has already been these funds’ purchase of important positions in Merrill Lynch, Citigroup, UBS and other investment banks. So far, not a peep from the politicians, but that won’t last.
We know, too, that as the greenback depreciates in value, foreign central banks are less inclined to keep stores of American presidents in their vaults and more interested in diversifying their currency holdings. The dollar’s share of central banks’ holdings of foreign reserves has fallen to 63.8 from 66.5 percent in the past year.
Equally important, oil-producing nations — which until now accepted dollars for crude and pegged their currencies to the dollar — are finding it increasingly difficult to hold to those policies. The dollars they use to pay the large foreign work forces on which their work-shy citizens rely now buy less and less when remitted to the workers’ wives and families. That is causing social discontent of the sort that horrifies the ruling classes in the Arab countries.
My guess is they will begin pegging their own currencies to a basket of currencies that includes the dollar, but in which the euro is importantly represented as well.
We know two other things. The first is that the U.S. economy will indeed slow, at least in the first half of 2008. The second is that America will elect a new president pledged to retreat from the nation’s historic position in favor of free trade. Doha and other trade deals, if not already dead, will breathe their last and be buried.
But these are all small things compared to the really big thing that we also know: The American economy is an amazingly resilient and flexible machine.
Remember the dot-com bust, now cited as the model for what we are about to go through? Since that dreary period, the U.S. economy added 8 million jobs. In real, inflation-adjusted terms, the value of the goods and services produced in America is about 15 percent higher than during the dot-com bust. And even after the precipitous drops of recent days, the leading share-price indices are healthily up over dot-com bust levels.
If you need any further proof of the ability of the U.S. economy to thrive after taking a blow, consider the speed with which output, employment and every other indicator rose soon after the devastating attack on Sept. 11, 2001. Or after Hurricane Katrina.
Or ask yourself whether you can identify the enduring effect of these events during the Clinton years, now remembered as a golden age: The Mexican peso crisis, the Asian financial crisis, and what scholars now call “the crisis of confidence and legitimacy of the international monetary and financial system.”
It’s fashionable to call the year just ended a year of two halves: prosperous first half, followed by a subprime-infected second six months. 2008 might just prove to be the reverse: stormy first half, followed by gradual brightening as America’s entrepreneurs find new fields to conquer.
Examiner Columnist Irwin Stelzer is a senior fellow and director of The Hudson’s Institute’s Center for Economic Policy.
