US Edgy As Money Flows to Europe
Growing international influence puts more pressure on nation's monetary policy, focuses on its debtor status
MANY Wall Street economists say the economic clout of the United States has diminished. ``We have lost a lot of our authority as a leader in the world,'' says James O'Leary, an economic consultant to United States Trust Company. ``Ten or 15 years ago we didn't have to pay much attention to what happened elsewhere. Now we are just one of the boys.''
A similar note is sounded by Bruce Steinberg, an economist with Merrill Lynch, Pierce, Fenner & Smith Inc. ``We are just not as important as we used to be,'' he says.
Federal Reserve Board chairman Alan Greenspan spoke of one aspect of the growing influence of events abroad on US economic affairs in testimony before the Senate Banking Committee Thursday. He blamed the recent rise in interest rates in Japan, West Germany, and the US on the anticipated appetite for capital to modernize Eastern Europe.
``This is an extraordinary change in the nature of the world's savings and investment which I don't think has any historical precedent, certainly not in the last 40 years,'' he said.
Mr. Greenspan described the ``huge investment requirement'' and ``potential for significant rates of return'' in Eastern Europe as having ``no historical precedent,'' as ``the most important financial issue of the decade.''
Some financial economists see this extra competition for international capital as a new limit on the Fed's ability to conduct monetary policy. For example, Gert von der Linde and Richard Hokenson at the Wall Street brokerage Donaldson, Lufkin & Jenrette Securities Corporation, write of how the moves toward a monetary union between East and West Germany ``will accelerate the international competition for long-term capital and will increase the upward pressure on long-term interest at least for months to come. US long-term interest rates will not escape this worldwide pressure.''
Here's the economic reasoning behind such views:
With a large federal budget deficit and trade deficit, the US Treasury welcomes foreign lenders as a way of keeping the cost - the interest rate - down on new issues of federal debt. Japanese money is considered especially important. When, for example, the Treasury auctioned $8 billion in five-year notes Thursday, financial analysts were watching to see if Japanese bidders were active.
In Japan and Germany, governments have been trying to restrain domestic inflation by boosting interest rates. Now the stronger international competition for money has added to the upward pressure on interest rates. As a result, interest rates have risen in the US despite an economy with little or no growth.
The Fed has been easing monetary policy since last June. But, economists say, it might have pumped even more new money into the economy to stimulate business activity if it was not concerned about both persistent inflation at home - and the need to encourage an inflow of foreign financing of the deficit and to discourage a flight of capital from the US. (On Wednesday, the government reported that consumer prices in January soared 1.1 percent, the sharpest increase in more than seven years.)
In other words, foreigners have a greater influence on US monetary policy than they once did. This is further compounded by the growing international debtor status of the US.
C. Fred Bergsten, director of the Institute for International Economics in Washington, figures that Greenspan worries about foreigners taking their money out of the US. ``These are the first fruits of the US becoming a huge debtor country,'' he says.
Investors overseas owned $1.46 trillion of US financial assets at the end of 1989, says Dr. O'Leary. Of this total, the largest foreign holding was US government securities at $433.8 billion. Foreigners held $395.6 billion of direct investment in commercial real estate and industrial properties. This is up 114 percent since the end of 1985. Foreigners also own $200.9 billion of US corporate bonds, and $208 billion of US corporate shares.
These foreign assets in the US exceeded the $770.4 billion in US-owned foreign assets by $689.4 billion. That latter sum, in other words, is the size of the US net foreign debt, making the nation the world's largest foreign debtor. Though some economists hold that this bookkeeping - based on Fed numbers - decidedly underestimates US assets abroad, there is no quarrel over the rapid increase in foreign purchases of US financial assets.
Looking ahead, Dr. Bergsten holds that the economic unification in the European Community, represented by the plans for 1992 and monetary union, will go ahead even faster because of the expectation of Germany unity. France's President Mitterrand will want to get together with West German Chancellor Kohl to weld greater Germany into the West European political and economic alliance even tighter, he says. The gradual accession of Eastern Europe to Western Europe will add $1 trillion in output to the $4.5 trillion already produced in the Western half of the continent.
Unified Germany and the ``mark bloc'' around it will become a third economic superpower after Japan and the US, he says.
Differing from the common Wall Street view, Robert Solomon, a Brookings Institution scholar, argues that the foreign demand for US assets is not a sign of weakness. Rather, many foreigners consider the US a good place to invest. This was reflected in a rising dollar on the foreign exchange markets last year.
Foreigners were ``overfinancing'' the US international payments deficit last year, he says.
Further, Mr. Solomon notes, there has been an enormous increase in the international mobility of capital in the last 10 or 20 years. That makes US financial markets more sensitive to interest rates abroad. But, he adds, ``it doesn't tell me that the US has become less influential or important in the world.''
Many economists disagree over whether the worst of the economic slowdown in the US may be past. The US Department of Commerce will release revised figures on the gross national product for the fourth quarter of 1989 Wednesday. These may give a clearer sign of whether the US is in recession.