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Return to this forum's introduction. Questions answered in this forum: Won't this have a negative impact on the U.S. economy? What signs will indicate improvement? Why does Singapore seem more stable? What is the IMF and how does it work? How would an Asian Monetary Fund affect economic and political dynamics?

Dean Hough of Irvine, CA asks: The unsettling economic instability in Asian markets, coupled with Japan's prolonged economic weakness, is likely to have two effects on the U.S. First, capital will flow from Asian markets to the U.S. as investors seek safe harbor in U.S. companies, bonds, and currency. In addition, a wave of fear will also flow to the U.S. as Asian currencies are devalued and financial institutions, like Japan's Yamaichi, collapse. The question is, which of these opposing forces will prevail in affecting the U.S. economy? Arthur Alexander responds: American assets, especially U.S. government securities, have become safe havens for nervous investors around the world. Foreign acquisition of U. S. government securities jumped from approximately $79 billion in 1994 to $138 billion in 1975, $245 billion in 1996, and an estimated $235 billion this year (first seven months at an annual rate). These data are from the Federal Reserve. Even though Asian purchasers have increased their demand significantly, more of the flow is coming from non-Asian countries. For example, last year, $98 billion was purchased by Asian countries (including Japan) and $147 billion by the rest of the world, especially the United Kingdom. What we seem to be seeing is a flight from the worrisome Asian currencies as well as a flight from the Euro. The reasons for these flows are reasonably clear. Returns are relatively high in the U.S., the dollar has been appreciating, underlying trends look positive, and the nation as well as the economy look pretty stable. Will the real problems from Asia infect Americans with worry, fear, and anxiety? Although the writer is correct to note that the U.S. will suffer some negative effects, these are unlikely to be as severe as, for example, the Latin American debt crisis of the last decade when American banks and companies were much more exposed. The U.S. economy got through that crisis with little general impact, although specific banks and companies were hit hard. China has its own problems, independent from those of the other Asian countries. (In fact, most of the Asian problems were independent of each other. They had the same root cause, though: non-economic allocation of capital that produced low or negative returns and that often had little prospect of paying back investors, be they bank lenders, shareholders, or government backers.) The difference with China is that its currency is not really convertible, which tends to confine the problems to the domestic sector more than in the other Asian economies. All in all, the U.S. is likely to export less to Asia and import more. This could have a macroeconomic drag on the economy next year and shift resources from export to domestic sectors. However, at the rate the American economy has been growing, this may have little overall impact even though specific companies and industries are likely to be affected, both positively and negatively. Nariman Behravesh responds: With Japan and the other Asian countries ailing, it's only a matter of time before China's economy is affected. At that point, roughly 25 percent of the world's economy ($8 trillion out of $32 trillion) will be suffering. How can this not have a negative impact on the U.S. economy? The negative impacts of the Asian crisis are likely to be dominant in the near-term. Overall, Standard & Poors DRI assumes that growth next year will be half a percentage point lower, due to the crisis. We are currently predicting a 1998 growth rate for the U.S. economy of only 2 percent. On the negative side, exports to Asia will be significantly weaker because of the downturn in Asia and the weaker currencies there. On the positive side, there is a "flight to quality" to the U.S. and, because of lower expected inflation, the Fed will be less likely to raise interest rates. Next: What signs will indicate improvement in the Asian economy?

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