[VIEWPOINT]Bad Economic Weather? It Will Pass

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[VIEWPOINT]Bad Economic Weather? It Will Pass

There is a dark cloud hanging over the U.S. economy. The $10 trillion economy, which was blessed by a 10-year boom, saw the most prosperous period in its economic history turned into one suddenly shrouded by unfamiliar uncertainty.

The Federal Reserve Bank has lowered interest rates every month for the last six months in an aggressive move to boost the economy, but there is still no sign that the economy will bounce back any time soon.

The global stock market, which once rocked whenever Fed Chairman Alan Greenspan murmured anything about the economy, now seems listless and tired of waiting. Where is the American economy going?

Predicting the future of the economy is much like trying to forecast capricious weather - and one economist has advised that it's just as futile to complain about erroneous forecasts.

Trying to predict tomorrow's economy is different from diagnosing today's. How can someone accurately forecast with so many factors changing all the time? We can only analyze past data scientifically and make an informed guess. Forecasts are inevitably subject to change with the appearance of new phenomena or economic factors.

Because of this, opinions on the prospects for the U.S. economy are diverse. Some say it is already in recession while others warn that soon we will need to worry about it overheating again. Most analysts say the U.S. economy will not tumble over the brink into recession, but they say there will be months of waiting before a full-scale recovery.

So why are there so many anxious faces? It has been pointed out that the advent of information technology and the new emphasis on globalization have structurally altered the U.S. economy, delaying the impact of economic policy. But it is difficult to evaluate this theory. Even in the past, it often took a long time for a rate cut to take effect. Even so, up until last year the influence of interest rate changes was enormous.

In fact, according to the reserve bank's economic model, rate cuts usually take six to nine months to have an effect. Analysts say a 1 percent cut induces a 0.6 percent increase in gross domestic product in one year and a 1.7 percent increase in two years. So we need to wait to see the effect of the economic policy implemented in January, especially if the new nature of the economy is further delaying the impact of economic policy.

Despite the need for patience, Mr. Greenspan looks ever more agitated. When the interest rate is lowered, we expect the cost of financing to drop and stock prices to go up. A rate cut also normally pushes the value of the dollar down. Consumption and investment increase and exports rise.

But though bank has cut rates 2.75 percentage points in six months, stock prices have fallen and the value of the dollar has risen. Mr. Greenspan is facing his biggest challenge in his 14 years in the post, as economic propositions apparently proven over the past 40 years fail to work.

Must we be patient, or has the entire nature of the economy changed? Of course, it could be a mixture of both.

There are arguments that Mr. Greenspan's impatience is artificially distorting the economic cycle. Perhaps the hasty increase in interest rates late last year perpetrated the economic slump by depressing the economy which was about to slow down. Perhaps, his recent aggressive rate cuts could overcompensate, leading to an overheated economy soon.

It is true that coupled with slump in economy of Japan and Europe, the U.S. economic situation is poor. But we must wait to see the effects of the rate cut. George W. Bush's tax cut will provide a further impetus to spend. Despite Friday's U.S. announcement of the lowest growth rate in eight years in the second quarter, our fears of a recession may prove to be misguided. Somewhere behind the clouds lurks the sun.


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The writer is a professor of economics at Yonsei University.

by Jeong Kap-young

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