Oh, what an enjoyable ride on the cycle the tricky
part is to dismount
CHRISTOPHER FILDES
New York The economy: stupid, or what? It has made so many Americans rich that it has made the United States Treasury rich too, and set the presidential candidates compet- ing to spend the money that will now flow in. So they are told, at least, and so they tell the voters. Al Gore goes on to say that the age of prosperity is only just starting: 'You ain't seen nothin' yet!' George Bush, more sim- ply, talks in terms of cutting taxes. His poor father (also George, and not so poor as all that) had to promise not to raise them: `Read my lips!' Up went taxes, all the same, and out of the White House he tumbled, eight years ago, unseated by a challenger with a simple idea of what won and lost elec- tions: 'The economy, stupid.' In the event, the economy turned out to be a late devel- oper. Encouraged by the kindly Alan Greenspan at the Federal Reserve, it pulled out of recession and headed for the heights. In time, what had looked like a healthy recovery found itself reclassified as a new paradigm. What was new about it was that it need never stop. Transformed by technology and innovation, it was now so much more productive that it could grow faster without overheating, or even carry on like that indef- initely. Besides, if it stumbled — if Asia's troubles infected it, or if, nearer home, Long Term Capital Management turned out to be a misnomer — Mr Greenspan would be there with hands outstretched to save it. He had warned against the dangers of 'irrational exuberance' in stock markets, but that was just his way. Anyone who took him literally missed the chance of riches. Happy days, while they last. Happy voters.
Cool for cats
THAT this is a novel economy, even the doubters agree. They just have their own ideas about what makes it novel. They observe, for a start, that Americans are over- spending their income, and, as for saving, seem to have bucked the habit. This sum- mer, on balance, they drew on their savings, for the first time since the 1930s. Why both- er to save, after all, if the market was making you rich? Instead, capital has been sucked on from all over the world, and has financed a huge deficit on the current account of the balance of payments, much to the benefit of other countries' exports. Investment has been leading this economy, and, naturally enough, the keenest investment has been in the new technology. After all, there were no limits to its applications or to the demand for them — or were there? An oil boom (says Jim Paulson of Wells Capital Manage- ment) brings in wildcat drillers, and a tech- nology boom brings in wildcat dot.coms. Some of these cats now look tame, some have been doctored and some put to sleep. Eve.com, which sold cosmetics, or tried to, has been dispatched to the happy computing ground, where it will join our own dear dizzy Clickmango. Hopes and options go with them, and their equipment will be sold for what it fetches. No shortages there, after all.
Risk at a price
THESE doubts have now spread to more conventional companies, which make things, or even money. Lucent and Nortel led the way in fibre optics. Everyone could tell you that everyone needed them. That has not saved Lucent from losing two-thirds of its value (and its chief executive as well) and Nortel's latest figures, last week, rocked the markets. Can it be that our appetite for gadgetry is satiable? Could the day ever come when we have enough mobile telephones? All that money that businesses spent to teach their computers to greet the new millennium by counting up to two — that, surely, is money that need not be spent again? No wonder that Nas- daq, which is high technology's favourite stock exchange, has fallen by almost a third from its peak. Some providers of venture capital must have lost more, and the queue to supply it has dwindled. Lenders, too, are becoming more choosy. They now attach more importance to their chances of being paid back, and their terms reflect this. They expect the government to pay them back (or to be last to default) but all other bor- rowers have to pay more, and borrowers, used to raising money on a wing and a prayer, are now reduced to praying. The day of cheap risk, says a Wall Street banker, is over. By now the optimists are looking for a soft landing.
A cart-propelled horse THEY cheered to the echo, and so did the markets, when the latest figures (for this year's third quarter) showed the economy slowing down smartly. Just a moment, though: in the new paradigm, are economies meant to come down to earth? Surely not? Landings are what you get from cycles, especially when you fall off them. We have all been for a long and enjoyable ride on this cycle, but it now seems to be wobbling. Indeed, as cycles go, it is more like a cart-propelled horse. It has gone as far and as fast as it has because the stock market has pushed it. We can only guess what would happen if the engine were switched off. There is now an established correlation between Nasdaq and the level of retail sales, which does not suggest that the Fifth Avenue shops can look forward to a dazzling Christmas. What would become of demand in the US economy if Ameri- cans releamt the habit of saving? For that matter, what will lead the economy once investment in the new technology slows down? Cheap risk has made it all possible, but wrongly priced risk can lead to a glut of investment, and did so in the world's sec- ond largest economy, back in the 1980s, when Japan was supposed to be leading the way. There, the indigestion still lingers. It is not an example that has to be followed, but there are hazards ahead, even if the presi- dential hopefuls shut their eyes to them. As Al Gore says, we ain't seen nothin' yet.
High off the hog
THE pig which misbehaved when travelling first class on US Airways (and has now lost its frequent-flyer status) prompts my hosts here to tell me of an episode at Andrews Base in Washington. Air Force One flew in, and the commander of the honor guard stood smartly to attention as the President walked down the aircraft's steps, with a pig under each arm. 'Fine pigs, sir.' They cer- tainly are fine pigs. There are no finer pigs in all the world. These are Arkansas razor- back hogs. I got one for Chelsea and one for Hillary.' Nice trade, sir.'
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