Hope for the Best, Plan for the Worst

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Hope for the Best, Plan for the Worst

Is it an omen of another great demise forthcoming or are current fears of the worst simply an overreaction? A barrage of downbeat news from the United States is making Koreans hold their breath about the future of our economy. Amid the uncertainty of the result of the U.S. presidential election, the U.S. Nasdaq stock index plummeted 23 percent in a month, the sharpest drop since 1987. The Dow Jones industrial average is barely managing to stay above the 10,000 mark.

The fundamentals are worse in the United States. Increasing unemployment is holding back consumers'' enthusiasm for spending, which has driven growth so far.

Demand for capital goods and corporate profitability are both falling rapidly. Moody''s ratings on corporate creditworthiness are the lowest since 1991.

All these problems look as if they may inflict pain on the Korean economy, which is heavily reliant on its exports to the United States. Based on current data, it would be an overreaction to talk about the Great Depression of the 1930s. But the United States of the 1990s had an uncanny resemblance to the 1920s, when the Depression''s seeds were planted.

After World War I, the United States replaced Britain at the helm of the world economy. The future looked promising. Radio was invented, automobiles became popular, and Lindbergh made his solo non-stop flight from New York to Paris.

Unprecedented economic prosperity raised Americans'' incomes, allowing anyone to dream of being rich. Following a speculative investment boom in Florida land, stock prices whirred up frantically. But visions of a seemingly never-ending economic expansion came to an end when stock prices crashed on October 24, 1929, leading to the Great Depression. This period has gone down in history as a lesson that bubbles are destined to burst.

The 1990s, too, started on an upbeat note. The United States overpowered the Soviet Union and emerged as the strongest nation in history since the Roman Empire. The Internet, information technology, the telecommunications industry and the flexible U.S. labor market have combined to shake a long-entrenched economic principle, the law of diminishing returns, and provided testimony that low inflation can be sustained amid high growth.

A so-called new economy arrived. No preceding era had ever reached this extent of mass prosperity. The affluent United States indulged itself, purchasing products from all over the world, and the dollars paid for those imports found their way back to the New York stock market. The returned dollars added fuel to the fire and sent stock prices soaring.

Armed with money earned in the stock market, American consumers kept up their spending, leading the nation to an accumulated international payments deficit totaling trillions of dollars.

No one heeded some economists'' warnings that a world as good as this could not last long. The U.S. economy recorded yearly 4.2 percent growth in the 1920s and a 3.62 percent annual rise in the 1990s.

Corporate profitability was similar, at nine percent and 9.4 percent respectively. The stock market grew by 496 percent in the 1920s based on the Dow Jones industrial average, and 504 percent during both decades based on the Standard & Poor''s 500. Whether only a coincidence or not, the resemblances between the two eras are remarkable.

Bubbles were even more rampant in the 1990s than in the 1920s. The total market price of stocks was equivalent to 110 percent of GNP in 1929. The same figure was 170 percent as of last March. American consumers'' debts are also nothing that can be ignored. In 1929, consumer debt was 53 percent of consumer income. That figure now stands at 67 percent. Consumers have built up too much debt to borrow more.

These data alone may not be enough to presume that another round of depression on the scale of the 1930s is in the offing. Still, the new economy requires technology innovation and a continuing supply of venture capital willing to fund risky investments.

The reality is that technological innovation is hardly sustainable for more than 10 years and the capital market has become unstable. Even worse, the instability in the Nasdaq, heavily weighted with technology stocks, is much more than that ever experienced by stocks in the pre-computer era market.

It does not take mental gymnastics to picture how the U.S. stock market will move when the dollars flowing out of the United States do not return to the United States, or when the U.S. government moves to rein in its economy. A collapse in stock prices will be unavoidable.

Unlike the 1920s, economic knowledge and the techniques of predicting the economy''s future have greatly improved and macroeconomic management techniques have advanced.

But bubbles can burst at unpredictable times and in unpredictable fashion. The worst should always be prepared for. A good start is to plan an effective economic policy program.

The Korean economy should prepare itself well through restructuring, economic normalization, or whatever these reforms are called, if the U.S. economy is turning down. The competition on the international stage will only get fiercer.
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