Commentary: It's A Mad, Mad, Mad, Mad World Economy

It's strange. On Wall Street, the Dow hits a record 4200 the same day the dollar drops to 85 yen. It's not supposed to happen that way. U.S. growth jumps to 4% in 1994, but inflation drops to 2.5%. Can you remember that happening before? Inflation hugs the ground, but interest rates spike to the sky. Since when? The unemployment rate drops like a stone, but wages don't budge. Productivity soars to 20-year highs, but all the gains go to corporate shareholders, not employees. Prices on commodities and intermediate goods jump but never get passed on to the customer. Gold dances close to $400 an ounce, but computer prices plummet.

What's going on? Is the world on the verge of an inflationary binge because the dollar is falling or a deflationary bust because the yen and the mark are soaring? Some economists are shaving their growth forecasts for Japan and Germany, while others are boosting their inflation forecasts for the U.S. Policymakers around the globe are confused, and so am I.

HOLLOW POINT. Central bankers seem just as lost. The folks at the Bank of Japan are hanging tough and not lowering interest rates much even as the yen heads toward 75 to the dollar. They're being stubborn even though there's no inflation in Japan. The currency surge has cut the prices of imports, economic growth has been dismal for three years, and practically all of Corporate Japan's capital is going to China or Malaysia or the U.S. to escape high costs. So why not loosen up? Will the BOJ finally cut the discount rate next week? Or does it actually want to hollow out the industrial heartland of Japan? If so, it's weird.

Germany's Bundesbank may have a better grip. It seems to want the mark to stop rising. After all, the "supermark" is beginning to seriously threaten Germany's strong economic recovery. In late March, the Buba took a weak shot at the foreign exchange markets by lowering a couple of short-term rates. But then, it didn't cut the most important Lombard rate. So what was that all about? Thanks to the strong mark, Germany is beginning to hollow out, too, with capital investments going to Poland, the Czech Republic, and, guess what, the U.S.

DOLLAR DAZE. Qigns from the U.S. Treasury aren't much more enlightening. One day policymakers talk tough about the dollar, and the next in background sessions they let it be known that they think the dollar is a commodity just like any other. When there's an oversupply, the price falls--just like coal, cucumbers, or cotton.

The Federal Reserve is not much better. Fed Chairman Alan Greenspan says he bases his interest-rate policy on domestic concerns. But then he turns around and tells Congress that our national interest lies in maintaining a strong dollar.

Who gets hurts in all of this confusion? Some economists tell you that Japanese and German industry will get killed if their currencies continue to climb. Others say history suggests that the U.S. is destined to suffer. The fact is no one really knows whether the turmoil in the currency markets is a dollar crisis or a yen/mark crisis.

Maybe the Japanese and the German central bankers are right in hewing to the old virtues of unrestrained restraint. But just maybe, market globalization and new technologies have created a new productivity paradigm. Maybe central bankers should begin to consider the possibility that the old game needs a new rule book.

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