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Global Glut Bringing Asian Chaos to Stable Economies


There was a time when low interest rates and a housing boom would have translated into higher prices and a cause for celebration at Sierra Pacific Industries, the Redding, Calif., wood products giant.

But instead of popping corks, Sierra Pacific and other U.S. wood products firms are shutting down production lines, trimming jobs and bracing for a further drop in prices that have already plummeted as much as 40% in the last 18 months.

The reason: Too many countries are producing too many things made of wood.

For the first time, these companies are facing stiff competition in their own backyard--not just from Canada but from Chile, New Zealand, Austria and Finland. Those same countries are also edging out U.S. firms in Asian markets, where the strong dollar has become a penalty.

"Losing markets in Asia wasn't nearly as bad as having that [foreign] product coming here," said Stan Blaine, marketing coordinator for the Sacramento-based Wood Molding and Millwork Producers Assn. "Only a certain number of our members were shipping to Japan. But when the foreign product came here, it affected a lot more people."

The wood products business is symptomatic of a global glut of apparently unprecedented scope--of everything from wood frame windows to automobiles, apples, semiconductors, oil, steel and more.

In a phenomenon that is both a cause and an effect of the Asia crisis, the world is awash in unneeded stuff.

This is where today's economic flat tire meets the road--where the chaos of financial markets translates into tangible woes in the "real" economies at home and overseas, closing factories, throwing workers on the street and putting companies out of business. It is a big reason why, even after financial markets stabilize, today's global economic crisis will linger for years.

Falling Prices Erode Value of Assets

And it is at the core of deflation, an economic condition so unfamiliar to today's Americans that it needs explaining: It's when prices go down, not up.

Sounds good, but if deflation cuts too deeply into the revenues of manufacturers, farmers and governments, it leads to production cutbacks, bankruptcies and rising unemployment. Falling prices erode the value of the assets of banks, which prompts them to cut back on lending. Nervous consumers start expecting prices to drop even further and put off spending.

It was largely to prevent the nation from falling into that downward spiral, one which has dogged Japan for years, that the U.S. Federal Reserve has slashed interest rates twice in recent weeks. The idea is to encourage spending and borrowing by making it cheaper.

"When you have a deflationary background, it's tough to get the economy moving no matter how low the interest rates are, because the public loses confidence and everybody keeps saving," said Jim Glassman, a senior U.S. economist at Chase Securities in New York.

Deflation can be destabilizing in other ways. Already, low oil prices are threatening the political stability of key oil-producing countries in the Middle East, Latin America, Eastern Europe and Asia. They fueled the recent economic collapse in Russia.

Deflation "is making the world a bit more unsafe," said Roger Diwan, director of global oil markets for the Washington-based Petroleum Finance Co. Ltd.

The trigger was last year's abrupt collapse of Asia's fast-growing markets and the spread of fiscal instability to Russia and Latin America. Those events have thrust more than one-quarter of the world into recession and destroyed markets for thousands of products.

But today's all-encompassing glut has deeper roots.

It can be traced to the collapse of communism and the opening of Russia, China and India to the world economy; the dramatic and often unjustified expansion of manufacturing capacity fueled by "hot" capital seeking high paybacks, particularly in Asia; the success of trade liberalization efforts, such as the World Trade Organization; and the creation of a technological, financial and transportation infrastructure that dramatically accelerates the movement of products and capital across national boundaries.

In simple terms, there is too much of nearly everything chasing too few buyers. Capital is not all that's moving across borders with lightning speed; so are goods--cars, apples, toys--by the shiploads.

Auto manufacturers are saddled with enough factories to produce 70 million vehicles a year, at least 20 million more than the world can consume. In Southeast Asia alone, auto sales are expected to fall from 1.3 million last year to 450,000 in 1998.

Oil stockpiles are 550 million barrels larger than in 1996, pushing prices down from about $18 per barrel at the beginning of 1997 to as low as $12 per barrel this year. In 2000, steel producers will have the capacity to produce more than 800 million metric tons, at least 200 million tons more than is likely to be needed.

Less Buying Power Depresses Prices

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