Column

WHEN ATLAS SHRUGS

DONALD COXE September 1 2003
Column

WHEN ATLAS SHRUGS

DONALD COXE September 1 2003

WHEN ATLAS SHRUGS

Column

Other major economies around the world are now contributing to global recovery

DONALD COXE

IT’S TIME TO END U.S. economic unilateralism! For too long, America has behaved as if the rest of the world didn’t matter. Those arrogant Americans act as if they are the only major industrial economy that has a growth strategy, and it is up to them to prevent a global recession. What an insult to the Europeans and Japanese! No wonder they’ve been delighted to vote against the U.S. at the UN. No wonder politicians and pundits worldwide warn of the perils from America’s go-it-alone attitude.

Although Canada’s elites yield to none in denouncing American unilateralism, that American determination to grow the U.S. economy through high-powered domestic stimulus provided an almost insatiable demand for the commodities, cars, car parts, and technology gear Canada produced. Result: the Canadian economy has outperformed the U.S. economy for the past four years, as American industry focused on outsourcing more and more of its production abroad. (Yes, China also won big from the decay of the once-proud U.S. industrial machine, but that’s another story.)

By generally accepted estimates, the U.S economy, which is less than one-quarter of the world’s economy, has accounted for more than half of total global economic growth since 1996. The U.S. has been the Atlas supporting the economic globe. Moreover, the U.S. “boom” has been driven by just two sectors—consumer spending and technologytelecom capital investing. So what can Atlas do now, when consumers are borrowed up to and (in millions of cases) beyond the hilt, and the technology and telecom industries are in trauma?

Alan Greenspan, the nation’s most famous devotee of Ayn Rand, knows what turmoil ensues when Atlas shrugs. So he’s making the burden of indebtedness bearable for most of the deeply indebted—consumers, corporations, and governments—by driving down short-term interest rates to nearDepression levels. Long-term interest rates followed short-term rates in the race to the

bottom in April and May, as investors responded to gloomy economic news and Greenspanian musings on the threat of deflation. Bond markets abroad joined in the desperate pursuit of yield through a deepening gloom. The most-quoted economist seemed to be Morgan Stanley’s Stephen Roach, who had long predicted a “doubledip” recession.

Then summer arrived. The Bush tax cuts kicked in, combining with those low-low interest rates to deliver what may have been Washington’s last bullets against a deflationary downturn. One of history’s biggest bond sell-offs came out of the summer haze. It was as if bond buyers worldwide had been simultaneously seized with a nightmarish scenario of burgeoning economic growth. A vision of fast-unfolding economic par-

MOST FORECASTERS (including me) assumed that China had been hit by SARS almost as hard as Toronto. Not so.

adise would be, of course, bondholders’ hell, and they rushed madly for the exits. The Fed (and other central bankers) kept short-term rates at bargain-basement levels, but other interest rates soared. What was going on?

Maybe it was the suggestion of better economic activity coming from some very unlikely places. German Chancellor Gerhard Schröder announced an economic program that meant, in effect, he was jettisoning the European Union’s Stability and Growth Pact that requires members to restrict government deficits to three per cent of GDP. Not only was he announcing significant tax cuts at a time of big deficits, but he was going to rein in the nation’s grotesque pension and welfare schemes. When the biggest and most powerful European industrial union, IG Metall,

abandoned a major strike in eastern Germany June, business sentiment indicators leapt. IG Metall had never, never had to give in to economic reality before. The German stock market became the strongest performer in the industrial world, an event that had long seemed as probable as a Rolling Stones concert in Bayreuth.

Another unlikely stock market performer emerged across the Pacific, as investors began assess the implications of a sustained growth Japanese corporate profitability. Almost unnoticed, Japan has been delivering powerful productivity gains, after years in which Japan Inc. kept people on payrolls whether needed or not. Some prominent global economic forecasters began raising their growth estimates for Japan—albeit from the non-existent to the moderately modest.

China weighed in with the announcement that growth had remained strong through the second quarter. Most forecasters (including, let it be noted, me) assumed that China had been hit by SARS almost as hard Toronto. Not so, as testified to by the most reliable of Chinese economic statistics, imports. They stayed strong even as demand for masks soared and international air passenger travel to China collapsed.

While interest rates on long-term bonds were climbing worldwide, so were prices for base metals—copper, nickel, aluminum, lead and zinc. Yes, the price rises for these commodities were not on the scale of the boosts long-term interest rates, but they all came once, even though these metals serve differing markets. The stocks of leading base metal companies staged strong rallies, confirming that the metals’ price increases were no mere blips. Meanwhile, container shipping rates also climbed, a sure sign that world trade was picking up.

Atlas is also flexing his muscles, thanks the steroid of tax cuts, but the financial problems of state and local governments (as displayed Imax-style by California) will make this Titan struggle. The rest of the world must pick up the slack, now that American economic unilateralism is faltering.

That may be happening—and just in time. Hollywood couldn’t write a better escape story. Maybe The Arnold figured that out and wants to be in Sacramento for the credits to roll when better times arrive. I?1

Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments. dcoxe@macleansca