The U.S. economy in 1999: Goldilocks meets a big bad bear?

Monthly Review, March, 1999 by Fred Moseley

Decline of Net Exports

The component of aggregate demand that will suffer immediate and direct impact from the global crisis is net exports (exports minus imports). The most immediate negative effect of the Asian-global crisis on the U.S. economy is a reduction of exports and an increase of imports. Because of the very large devaluation of the Asian currencies, U.S. goods are now relatively much more expensive. Both U.S. exports and U.S. goods are competing with cheaper imports on the domestic market. In addition, the sharp decline in the Asian economies reduces Asian demand for U.S. exports even more. Finally, it is alleged that some Asian producers are "dumping" their goods on the U.S. market (i.e., selling them at a loss, for less than they cost to produce) just to obtain some revenue as their sales in Asia collapse.(1) The loss of export markets, as well as domestic markets, not only reduces aggregate demand in the U.S. economy but also means fewer jobs for U.S. workers and hence a higher rate of unemployment.

So far, U.S. exports to Asia have declined about 20 percent and imports from Asia have increased about 10 percent. Since total U.S. exports is only 12 percent of U.S. Gross Domestic Product (GDP), and the percentage of U.S. exports that goes to Asia (including Japan) is only about 30 percent, this reduction in U.S. net exports (exports minus imports) has had only a small negative effect on the rate of growth in the U.S. economy (less than 1 percent). Many economists have concluded that the worst of the Asian crisis is over (i.e., that these economies have "bottomed out" and will start to recover next year) and hence that the negative effects on U.S. exports and imports should not worsen further in the year ahead. If this prevailing view is correct, then this small negative effect should not be enough to cause a recession in the United States.

However, I doubt very much that the Asian crisis is over. Rather, I think that this crisis is still in its early stages, with much more, and the worst, to come. The main reason for this hypothesis is that many (perhaps most) capitalist enterprises in Asia today (including in Japan) are technically bankrupt. They are losing money (revenue is less than costs) and they are unable to meet their current debt obligations. Joseph Stiglitz, chief economist for the World Bank, was recently quoted in the New York Times as saying: "In Indonesia, 75 percent of the firms are bankrupt. How can you run an economy when 75 percent of its firms are bankrupt?" The short answer is: you can't. Similarly, estimates for Korea show that "cash flow" (profits plus depreciation) for the corporate business sector as a whole is less than the current interest payments due.(2) In other words, depreciation charges are being used to help make interest payments, and even this is not enough. The negative gap between cash flow and interest payments in Japan's corporate sector is probably similar to Korea's, and perhaps even worse. As these economies continue to decline in 1999, the bankruptcy of business firms is likely to increase still further.(3)