If you're looking for parallels between the Crash of 1987 and the Crash of 1929, the first place to look is abroad. The reaction has been: Those crazy Americans are about to destroy the world economy--again.
To many foreigners, the United States is a wild and free-swinging place. We're a cowboy society. American freedom and unpredictability both charm and frighten foreigners. Now these stereotypes are being applied to the financial crisis. Excessive American speculation and irresponsible economic policies are being blamed.
On one level, the reaction is understandable. Wall Street started the wave of panicky selling that swept stock markets around the world. And huge U.S. trade and budget deficits invite ridicule.
But though understandable, this analysis is wrong. More important, if it affects government policies abroad, the result could be ruinous. Only part of the stock market crash stemmed from excessive speculation. Beyond that, the panic reflected basic fears about the world economy. For much of the 1980s, the U.S. economy has helped power world economic growth. But the American economy is now slowing down. If other countries--led by Germany and Japan--can't grow faster, there could be a global recession or a long period of stagnation.
It was the huge U.S. trade deficits that acted as a worldwide stimulus. But the trade deficits had to stop growing--and providing stimulus--for two reasons.
First, foreigners have tired of holding the dollars they receive for their products. The dollars have to be reinvested in U.S. stocks or bonds, but foreigners have a limited desire for these securities. Indeed, the stock market crash could further dampen their enthusiasm. As a result, the dollar has had to depreciate on foreign exchange markets, as foreigners sell unwanted dollars. In turn, a cheaper dollar is slowly making U.S. exports more competitive and imports more expensive. The U.S. trade deficit has stopped growing and could soon begin to drop.
Second, strong spending in the United States (which led to the trade deficits) was based on more than the U.S. budget deficits. American consumers and businesses also borrowed heavily. Between 1980 and 1986, household debt rose from 51% to 62% of gross national product, according to Harvard economist Benjamin Friedman. Corporate debt rose from 32% to 40% of GNP. Americans could not continue the rapid rise in debt burdens. As borrowing slows, so does the appetite for imports.
Getting faster growth abroad won't be easy. Selling to the United States--or displacing American exports to third countries--may have camouflaged underlying economic weaknesses in Europe and Asia. Even with the best of intentions, governments can't control their economies with great precision. But without a recognition of the need for faster growth, the outlook is bleak.
That's precisely the danger. A few foreign officials are urging new policies. West German President Richard von Weizsaecker has suggested Europe embrace a "suitable and sensible growth policy." But the stock market panic has also triggered an orgy of America bashing, even among sophisticated observers.
Here is Kenichi Ohmae, managing director of the Tokyo office of McKinsey & Co., the American management consulting firm. Ohmae is hardly anti-American, speaks English fluently and understands the United States well. Writing in the Washington Post, he says: "Let's be blunt. Americans have mismanaged not only their own economy but the world's . . . You have expected the rest of the world--especially Japan and Germany--to underwrite your inability to come to grips with your own economic problems."
There is a deep misunderstanding abroad about the causes of today's dangerous imbalances in the world economy: the huge U.S. trade deficit and the surpluses in Germany, Japan and other countries. The basic cause lies in the dollar's role as the major international currency. In the early 1980s, foreigners began investing dollars heavily in U.S. securities. American inflation was dropping, while interest rates were attractive. These investments promoted imbalances in world trading patterns.
Consider a foreign exporter to the United States. It receives dollars. If it sells the dollars for its currency--say German marks--then the dollar depreciates, making the country's exports more expensive and U.S. products more competitive. Trade imbalances correct themselves. Indeed, as its exports weaken, the country may stimulate its own economy to promote greater growth at home. None of this happened in the early 1980s, because foreigners reinvested their dollars in dollar securities. The U.S. trade deficit soared, while other countries became dependent on export-led growth.
The question now is whether this pattern of global growth can be gracefully reversed. The United States needs to export more, while the spending of U.S. consumers, businesses and government slows down. Other countries should speed up growth and imports. But it's unclear whether we can get from here to there. The process won't be helped if, as in the 1930s, governments blame each other for the world's problems. Repeating that mistake would be an enormous blunder.