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MARKET INFLUENCES
August 26, 1998The NewsHour with Jim Lehrer Transcript |
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Stocks fell sharply today as global markets reacted to discouraging economic news out of Russia. To what extent do events in other countries affect Wall Street and the American economy in general? Paul Solman and three investment experts discuss the interconnectivity of global economies.
A RealAudio version of this segment is available.
NEWSHOUR LINKS:
August 24, 1998:
President Boris Yeltsin sacks his government.
August 5, 1998:
The U.S. stock market continues its roller-coaster ride.
July 31, 1998:
How is Asia's economic crisis affecting the United States.
May 28, 1998:
The Russian government tries to maintain the value of the ruble.
April 3, 1998:
The U.S. economy soars as Japan continues to fall.
February 3, 1998:
The rippling effect of the Asian economic crisis.
Browse the NewsHour's coverage of economic issues , Asia and Europe.
OUTSIDE LINKS
The International Monetary Fund .
The Treasury Department .
SPENCER MICHELS: The New York Stock Exchange continued its downward slide today, finishing more than 79 points. The Dow has lost almost 10 per cent of its value since it reached its all time high in July. The Asian economic crisis and the difficulty Japan has had in reforming its economy have contributed to the decline. But Wall Street analysts say another reason has been instability in the troubled economies of emerging nations.
The Russian financial crisis.
The crisis in Russia is the most recent case in point. Following Russian President Boris Yeltsin's firing of his whole cabinet on Sunday, panic spread among traders and international investors. Yesterday, the ruble took its worst hit in four years, losing 9 percent of its value against the dollar. The currency had been under severe pressure for several weeks as the Russian economy faltered. And today, the Russian central bank closed all ruble/dollar trading after the ruble started to fall again this morning. Some Russians ran to their own banks to sell their rubles for dollars, but many banks stopped selling dollars today for fear of running out of currency. And stores are closing in Moscow, as merchants try to figure out how to price their products with a ruble that was devalued by the government 10 days ago. Halting trading did not stop the ruble from weakening elsewhere. It lost nearly 41 percent of its value against the German mark today. In other regions of the world, economic woes are raising concerns among U.S. investors as well.
Russian President Boris Yeltsin, right, with recently-reappointed Prime Minister Viktor Chernomyrdin.
Russia is not alone.
In Latin American nations, inflation rates are up and currencies are losing value. In Venezuela, analysts are worried that lower oil prices among other economic factors may lead to a devaluation of its currency, the Bolivar. Stock markets in many Latin American nations are dropping. In Brazil, the major stock index is off 25 percent this year. Venezuela is down a whopping 63 percent, and the stock index in Mexico is down 35 percent for the year, while the peso reached an all time low against the dollar. With more than 20 percent of U.S. exports going to Latin
America and Russia, American investors are concerned that the instability in those areas could have a major impact on the U.S. economy.
PAUL SOLMAN: With me now are Richard Medley, political and economics consultant on Wall Street; John Campbell, economics professor at Harvard University; and Moises Naim, editor of "Foreign Policy Magazine," and the former economics minister of Venezuela. And welcome to you all. Richard Medley, let's start with what's happening in Russia. Why is the market there plummeting?
Loss of confidence in the Russian government.
RICHARD MEDLEY, Medley Global Advisors: Basically, people have lost total confidence in the Russian government and two days ago the Russia government came back and announced a total default on its bonds, that is, it's not going to pay its bondholders much of anything, maybe 10 cents on the dollar maximum; and secondly, then they let the ruble devalue, which cost investors even more. Basically, people have been wiped out in Moscow.
PAUL SOLMAN: People by-people-you mean investors?
RICHARD MEDLEY: Absolutely.
PAUL SOLMAN: Muscovites, both?
RICHARD MEDLEY: Muscovites have been wiped out, as you just said. They have to figure out how much they're going to have to pay for everything from dresses to meat now. They're really going to be wiped out over the next six months.
The so-called Asian economic flu.
PAUL SOLMAN: Now, does this have anything to do with Asia and the spreading of the so-called Asian economic flu?
RICHARD MEDLEY: It has two things to do with that. One is what we call a portfolio contagion, that is, imagine the money markets really are made up-there are a lot of people in the money markets, but people really direct the mass amounts of capital-two-three trillion dollars-there are maybe fifty or sixty of those people in the world. Unfortunately, they'd all made the same bet; they'd all bet you could make a lot of money in emerging markets around the world by going for the higher interest rates and the higher returns they were offering, and they bet basically that the G-7, the United States, and other major industrial nations would be there to back these markets up and bail them out. That bet turned wrong, and it's turned wrong in a big way.
PAUL SOLMAN: Mr. Naim, what about Latin America, is that part of the contagion here?
MOISES NAIM, Foreign Policy Magazine: Yes. Latin America has been contaged in a variety of ways. There's a trade contagion-more from the Asianfront than from anything else.
PAUL SOLMAN: When you say trade contagion, what do you mean?
Market losses affect international trade.
MOISES NAIM: Asia's demand for products that Latin America exports, like oil, copper, soybeans, has declined, and the prices, therefore, of these products worldwide have gone down, so the prices of Latin American exports are low, and lower, and therefore, that's one source of contagion. The other thing is that in Asia there have been major devaluations, and those devaluations make their exports cheaper. So Asians can now export to the rest of the world much cheaper products.
PAUL SOLMAN: Because their currencies-
MOISES NAIM: Has devalued.
PAUL SOLMAN: --are worth less-
MOISES NAIM: Right.
PAUL SOLMAN: --in the terms of the people who are buying.
MOISES NAIM: So if you are-you know, you are manufacturer of blue jeans in Argentina, or in Mexico, you now have to compete with these countries that were already very competitive and now can manufacture blue jeans at very-at even lower costs, because of the devaluation.
PAUL SOLMAN: Professor Campbell, I wanted to get Professor Campbell in here, why should these markets affect each other so heavily, so dramatically?
JOHN CAMPBELL, Harvard University: Well, it's the fundamental connections that we've just heard about involving trade and prices of commodities, but there are other forces too. The financial markets are linked in the sense that the same investors are investing in all these markets.
PAUL SOLMAN: These are the people that Mr. Medley was talking about-the fifty or sixty huge money managers?
JOHN CAMPBELL: Yes, and smaller investors as well, but one of the things they're counting on is the presence of international institutions to provide liquidity in the event of a financial crisis.
PAUL SOLMAN: You mean to lend money?
JOHN CAMPBELL: To lend money, to help countries get through periods in which investors want to take their money out.
PAUL SOLMAN: And that was what Mr. Medley was saying, they were betting on in the beginning, that the U.S. would back up these Russian bonds and so forth?
JOHN CAMPBELL: That's right. And those resources of the international community, particularly the IMF, the International Monetary Fund, are being severely drained by events in Asia and now in Russia, and so it's really reached the point where the IMF can't continue to prop up the Russian situation, and there's that much less that's left over in the event of problems in Latin America.
PAUL SOLMAN: I mean, you're saying that the IMF is potentially broke-or not broke, but that it can't afford to-
JOHN CAMPBELL: It's beginning to run out of money, yes.
Expectations may have been too high.
PAUL SOLMAN: But why and how is this affecting the United States? I mean, we've heard often on this show that the United States-only 15 percent or so of our economy is related to world trade. I mean, you know, we're basically self-sufficient, so why would it reverberate here?
JOHN CAMPBELL: Well, I think what you have to understand is when you're looking at the stock market in this country, the value of large U.S. corporations is very sensitive to world development. The background here is that the U.S. stock market has been extraordinarily highly valued, and it seems clear that investors have based their valuations on the notion that the world economy as a whole is going to grow strongly, and this is going to benefit large corporations, particularly those with brand names. Think of Coca Cola for example. Why should Coca Cola be worth so much?
PAUL SOLMAN: And it is very high even in comparison to its earnings.
JOHN CAMPBELL: To its earnings today very high. What can justify that value? It has to be the notion that in the future consumers around the world are going to be willing and able to pay a premium for Coca Cola.
PAUL SOLMAN: There's one billion, two hundred million mouths to drink Coca Cola in China-
JOHN CAMPBELL: If that's no longer going to be true, or that scenario is going to come about more slowly, then that has a big negative effect on a company like that. It's noticeable that these large companies are the ones that have managed to retain their value this year, whereas, smaller companies have already fallen in value.
PAUL SOLMAN: Mr. Medley, I still want to press this point about the United States. I mean, Russia, Latin America, these are tiny markets by comparison to the United States, no?
RICHARD MEDLEY: Yes. But the total of markets who have fallen to new lows, that is, now three, four, and five year lows this year, make up 1/3 of the world GDP so far. And we've seen Canada weaken very dramatically over the past few weeks. Mexico is now starting to falter. Really what's been holding up the U.S. economy has been that exports to Canada and Mexico have really made up for all that we've lost in Asia, without-as they start to weaken, then, people do have to build in a contagion effect even in the United States.
MOISES NAIM: Can I-
PAUL SOLMAN: Please, Mr. Naim.
MOISES NAIM: About how tiny these markets are.
PAUL SOLMAN: Yes.
MOISES NAIM: The United States exports more to tiny Chile than it exports to India. It exports more to Brazil than it exports to China. 40 percent of all American exports go to Latin America.
PAUL SOLMAN: 40 percent?
MOISES NAIM: 40 percent. So if you take these numbers, they may be tiny, but they are a very significant part of American exports, and a destabilization of these markets or if these markets lose their capacity to buy the United States products, it is bound to create unemployment and other consequences here.
What happens to money lost in the market?
PAUL SOLMAN: I want to ask you a technical question, Professor Campbell. Where has the money gone? I happen to have put $3,000 in a Russian mutual fund two years ago. I called up today in preparation for this. It's now worth $603.10. Did somebody take my money? I mean, what happened to it?
JOHN CAMPBELL: Well, what happened is that, you know, that price reflects the best assessments that investors collectively can make of the value of your investment, of the underlying assets. And you might ask where did that go?
PAUL SOLMAN: That's what I am asking.
JOHN CAMPBELL: The reason is that assets don't have value in themselves. They have value for how they're used and the profits that they can produce, and if an economy turns sour and the capital is not being well used, as for example it clearly isn't in Russia, then that value can disappear very quickly.
RICHARD MEDLEY: But I think the short answer is really that it has; it's vanished; it's disappeared. And that's-as Professor Campbell said-that's one of the major problems we're facing is all of a sudden about a trillion dollars in world GDP has disappeared. It no longer exists. Mr. X doesn't have it. Mr. Y doesn't have it. No one has it.
Gauging the worth of stocks.
PAUL SOLMAN: So this all boils down, then, Mr. Medley, to a question of confidence in the world economy and expectations about the future, and the minute that turns, then suddenly everything is worth less?
RICHARD MEDLEY: Well, it did boil down to a matter of companies. Now you've really got real economic consequences and real financial damage. I mean, when Russia declared essential default the other day, all of a sudden big market players like Credit Suisse, First Boston, had to mark those positions to market, they had to say now we have to admit these things are worth a lot less than we thought they were, and it-
PAUL SOLMAN: These things meaning the bonds that they were holding.
RICHARD MEDLEY: The stocks, the bonds-
PAUL SOLMAN: Or the stocks.
RICHARD MEDLEY: Everything they were holding now are worth so much less we have to say to our stockholders, we're going to take a big hit at the end of this quarter, and institution after institution is going through that, and investors are turning around, like you did today, and saying, wait a minute, $600, well, I'd better take that $600 while I still have it--
PAUL SOLMAN: No, I didn't do that.
RICHARD MEDLEY: --and put it somewhere where I can be safe, which is why you've seen Americans bonds and German bonds rise so sharply in price and interest rates fall so quickly over the past few days.
PAUL SOLMAN: No. I can just imagine, though, if I were a Russian and I had $3,000 two years ago and I had $600 today, I'd just be in utter despair.
RICHARD MEDLEY: You'd have about $200 today, but, yes.
PAUL SOLMAN: Did it go down even more since I checked? All right. Well, anyway-don't tell me stuff like that, particularly on the air. Mr. Naim, is there-is there confidence among policy makers that we know how to get out of this contagion, that we know the medicine to take?
The threat of false remedies.
MOISES NAIM: One of the contagions that is taking place is a contagion in ideas, and policy makers and different countries are trying to learn what to do and what not to do. One important danger that is looming out there is that countries will start experimenting with false remedies, like defaulting on their debts, like trying to close down their economies, like doing -We have a very interesting example. When in 1982, Mexico defaulted on its debt, and then adopted a whole set of very protectionistic closed, interventionist policies. It took 10 years for Mexico to recover. When in 1994, December of 1994, we also-had to deal with a severe crisis. It did completely the reverse, and was much more open and adopted a much more vivacious and daring and bold sort of policies of opening up, and-
PAUL SOLMAN: Free market-
PAUL SOLMAN: Free market policies.
MOISES NAIM: Right. In one year Mexico was back on its feet. So-but it's possible to imagine that in the next few months we will see an eruption of discussions about the need to impose capital controls, not to allow this money to come in and out freely, to try to close economies, and to try to avoid these economies, try to protect them, quote unquote, from being linked to the global economy in a way that creates these disruptions, which are going to be, as I said, false remedies. They are not bound to work.
PAUL SOLMAN: Well, I thank you all very much. Professor Campbell is nodding in agreement as we close. Thanks.
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