The Global Economy Is Looking Very 1990s
Oil prices are falling, seemingly inexorably. Emerging market countries are having currency crises. A previously unstoppable East Asian economic power -- the world’s second-largest economy -- is slowing, and the country’s leaders at times seem to have lost the plot. Russia is an economic mess. Europe’s economy is being held back by German political decisions and doubts about the common currency. The U.S. economy is relatively strong, but is beset by a productivity paradox in which remarkable Silicon Valley innovations don’t seem to be having an impact on the economic data.
Is this year starting to feel like it belongs in the 1990s, or what?
I’m not going to even get into all the pop-culture resemblances, or the fact that a Clinton and a Bush are running for president and Al Gore has reportedly been thinking about it. In economic terms alone, there are a lot of parallels between the current situation and that of the mid-1990s in particular.
I think all the parallels I mention in the first paragraph are self-explanatory except perhaps the one about German politics. So here goes: The 1990 decision by Chancellor Helmut Kohl to let East Germans exchange their largely worthless Ostmarks for Deutschmarks at a 1:1 exchange rate gave the reunified nation an economic hangover that lasted for years and affected its neighbors too. In recent years austerity measures forced on southern European countries in part by German politicians have arguably again held back growth in the euro area.
Now, there are also lots of things going on in 2015 that shouldn’t remind anyone of 1995. History doesn’t repeat. I’m not even sure it rhymes. But there do seem to be some similar economic forces at work.
One is that commodity prices are falling, as they did in the 1990s. The other is that the U.S. economy has gone back to being the main driver of global growth, which has brought with it a big strengthening of the dollar. These two are related. Even with the recent boom in domestic oil production, the U.S. is a net importer of commodities, so falling prices tend to boost growth. This is also true for the world’s other big economies -- Western Europe, Japan and China -- but all these places are facing economic headwinds that the U.S. is not. So the U.S. share of global economic output has been on the rise.
As the chart shows, during the long run the U.S. share is shrinking as other countries catch up in affluence. But there’s been a strong cyclical element as well. Now it looks as if the cycle may have turned, and if that’s the case we’re likely to see a few more years of the U.S. gaining economic share just as it did in the second half of the 1990s.
Much of this gain will simply be the work of a strengthening dollar, which will put pressure on countries that link their currencies to the dollar, as was the case in the late 1990s. That will mean more emerging-market currency crashes and perhaps financial crises. In the late 1990s those crises would scare investors in the U.S. and usually bring a temporary decline in asset prices, but in the end the result was always more money flowing into the U.S., and continued economic growth. It finally took a homegrown stock market bubble and crash to bring the fun to an end.
Alan Greenspan’s Federal Reserve of course played a role in all of this -- holding back on raising interest rates in 1995 because of a (correct) hunch that a productivity boomlet was coming (current Fed Chair Janet Yellen was a Fed governor at the time and supported this approach), then cutting them in late 1998 in response to a Russian debt default and the subsequent collapse of the hedge fund Long-Term Capital Management. Cutting rates will be a lot harder to do this time around with the current effective federal funds rate at 0.15 percent, and there’s widespread concern that, after spending the past six years trying to keep the economy afloat after a historic financial crisis, the Fed doesn’t have a lot of ammunition left.
So that’s one big difference from the 1990s. Another is that the slowing East Asian juggernaut -- China this time instead of Japan -- accounts for a much bigger share of the global economy but is also a lot poorer on a per capita basis, which could have all sorts of economic and political ramifications. Yet another is that while the U.S. is still the core of the global economy, it is a smaller core than it was in the 1990s and thus less reliable as a global growth locomotive.
Still, this does feel familiar. I’m just having trouble deciding whether to find that reassuring or alarming.
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