The millennium dividend
After a June-to-September U.S. presidency eclipsed by the secrets of that famous blue velvet dress, and a prolonged summer quaffing champagne and canapes as world stock markets rode ever higher to mid-July, followed by a protracted period of navel gazing, the world's money men finally hit the brick wall when first Russia defaulted, then their own banking system seized up. On Sept. 23, the New York Fed stepped in to bail out the wrong- footed insolvent US$200 billion hedge fund Long Term Capital Management with a hastily arranged $3.5 billion loan to avert a market rout as funds everywhere tried to cash out their holdings.
At first, the U.S. Federal Reserve Board, at its meeting on Sept. 29, lowered interest rates by a quarter of a percentage point, from 5.5 percent to 5.25 percent. The world's stock markets continued to drop in disdain at this derisory response. Other countries followed suit with small cuts in interest rates, which helped slow, if not arrest temporarily, plunging markets. Then, Alan Greenspan, the Fed's chairman, announced a surprise further quarter point cut on Oct. 15.
Since then, markets have regained some of their appetite for risk. Since early October, share prices have recovered about half of their earlier losses, while the U.S. corporate bond market has gone back into business as the nation's major lender to U.S. corporations.
Over the last six weeks, the world's central bankers have moved quickly and decisively to avert the "dash to cash". For when people rapidly divest themselves of their near-liquid assets, such as shares and callable loans, which had happened at an increasing pace over the previous 10 weeks, not only do such asset prices drop, but the value of new, longer-term investment in raising capacity drops even more dramatically as demand for it evaporates.
So this week, like last and the preceding five weeks before it, average interest rates around the world are moving south again. They are expected to continue to do so, if more slowly, to the middle of next year.
Last week it was the turn of Italy (down 1.0 percent). This week, so far, Portugal (0.5 percent), Spain (0.25 percent), Sweden (0.25 percent) and Singapore (down to 2.0 percent). On Thursday, the central banks of Britain, France and Germany all meet separately, with Britain expected to lower rates by between 0.25 percent to 0.5 percent.
By far the largest fall in interest rates within the Euro-11 will be in Ireland. It has to lower rates by 2.45 percent in order to converge with the Franco-German level of 3.3 percent by the end of the year in preparation for the launch of the euro on Jan. 1, 1999, now just eight weeks away.
Looking further out, currency markets expect U.S. interest rates to fall from 5 percent now, to a low of 4 percent over the next 12 months, while rates in Europe could fall to 3 percent during 1999. The discount rate for the yen is expected to remain unchanged at 0.5 percent.
By mid 1999, interest rates in the world's big three economic power houses of the U.S., Western Europe and Japan should average 3 percent or below. This will be their lowest level in more than 50 years. A level fitting the worst financial crisis in the last 70 years!
So what does this mean?
In short, a consumer boomlet!
With confidence returning, a plentiful supply of low-cost money to those with a low credit risk and most asset prices below their levels of a year ago, the world should be into the beginning of the biggest buying spree this side of the millennium!
Buy now, pay later by all means. But be sure to lock into those low fixed-term loan rates. For medium-term interest rates in the big three economies are all expected to move quickly higher to stave off a bout of ensuing inflation.
And for those with no credit rating at all. Pray that the moneyed middle classes of the world get out and spend. For without their dollars, euro and yen hitting the sales tills, the outlook for the world economy is bleak indeed.
SEAMUS MCELROY
Jakarta