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Jewish World Review / May 8, 1998 / 12 Iyar, 5758

William Pfaff

Things can only get better and better!

PARIS -- A friend said to me the other day that the word "crash" no longer is part of the American vocabulary. We only know stock market "correction," and corrections have just to be waited out.

He explained to me that the stock market only goes up, because immense popular and political interests, as well as corporate interests, are today committed to its only going up. His implied argument was that the American government has no choice but to make it go up.

It struck me, as he was speaking, that this might have been what Jay Gatsby was saying to his friends during the luxurious summer of 1929, a few months before Gatsby disappeared off the end of that dock in West Egg, on Long Island Sound, or went back to the Middle West -- if it was the Middle West -- which, for Gatsby, would have been worse. But I am a child of the Depression.

It also struck me that this belief that Washington has the power to make the market perpetually go up contradicts what everyone in the markets has been saying during the last few years, which is that in the age of globalization and liberalization, governments are no longer relevant; they should get out of the way of the market.

We have recently seen crashes in the Asian markets. Most Americans, including President Bill Clinton, seem confident that the United States will not suffer from what happened in Asia. The general belief is my friend's belief, that the American economy now has been transformed into one which can only grow.

This seems to me a very romantic view of globalized American capitalism, which by objective measurement has not proven notably more efficient (nor even more globalized) than the post-World War II economy. The level of international exchanges is little larger today than it was at the end of the 19th century, when the industrial countries functioned on the gold standard -- their version of a single currency.

Since the end of fixed exchange rates in 1971, the major industrial economies have mostly seen lower growth, higher unemployment, and lower productivity growth than before. They experienced a sharp deterioration in overall performance in the 1980s and early 1990s, as John Eatwell, president of Queens' College, Cambridge notes in a new Swedish Foreign Ministry assessment of globalization. Growth of GNP in the major industrial countries during the 1983-1992 period was about half that of 1964-1973. Growth of GNP per capita during both periods was lower than in the immediate postwar period in 18 out of the 20 OECD countries.

It is true, as President Clinton recently said, that "over any given 15- or 20-year period, the stock market has always outperformed...government bonds." One reason this is true is that world war and cold war drove the economy. As recently as the Reagan administration, the U.S. gave itself a solid stimulus of Keynesian deficit spending. Britain, the other leading free-market economy, enjoyed a bracing devaluation in 1992 (the effects of which now are wearing off).

The other reason Mr. Clinton is right about the stock market is that you knowingly accept a fixed return from bonds because your money is safe. Stocks may outperform bonds on the way up, but stocks can also ruin you by going down. It's all in the timing.

The United States has been the principal beneficiary of globalization. The largest net international transfer of resources between 1983 and 1992 was to the United States, at an average rate of $100 billion per year. After 1992 there were big net transfers of both portfolio and direct investment to Asia and to Mexico as a result of market liberalization there, leading up to financial crisis in both places.

The fact that the American investors escaped major losses in those crises, thanks largely to American-promoted IMF rescues, has added to Americans' sense of invulnerability in the new economy. This undoubtedly is influenced by the parallel American sense of political and military invulnerability. The same friend said to me, "Do you think any other empire has ever been so powerful?"

I said that in sheer physical power, the answer obviously is no. But Greece, Rome, the great Arab empire of the 8th to 12th centuries, Spain and Portugal, Britain, France --- all left more profound and even positive cultural marks on the foreign societies they dominated than the United States has done.

America's global hegemony is only a few years old, and the sustained American world engagement goes back only to 1941. We will see what comes next. It is not unreasonable to argue that we today experience the peak of America's influence. But even if that is wrong, I cannot believe that the American market can only go up, which would mean that we have found the alchemists' stone --- an unlikely story, as Jay Gatsby himself would have acknowledged.

I would stick with an older American assumption, that if something seems too good to be true, it probably is.