|
Brazil won't affect the U.S.
|
 |
January 13, 1999: 12:41 p.m. ET
Williams said crisis won't head north, sees rising labor costs at home as real problem
|
NEW YORK (CNNfn) - Mounting concerns over Brazil are wreaking havoc on European markets Wednesday. There are some on Wall Street, however, who argue that the crisis in Brazil will not have a major impact on the U.S. economy.
CNNfn spoke with Bankers Trust global economist John Williams about where Brazil and other Latin American markets may be heading, and the implications for the U.S. and world economies.
Here is his "Before Hours" interview:
LAUREN THIERRY: First of all, let's start off just clearing the slate here. This is a de facto devaluation… this is not real devaluation. It is de facto, based on the numbers.
JOHN WILLIAMS, GLOBAL ECONOMIST, BANKERS TRUST: That's right. It was inevitable that the real had to fall pretty dramatically, and whether they did it officially or whether something like this happened, it was really just a matter of time and now it's happening.
THIERRY: And this combined with a -- perhaps a default -- people anticipating defaults and at least one state there saying that it will withhold its payments for at least 90 days?
WILLIAMS: It's going to be a mess in the emerging markets generally and in certain Latin - certainly Latin America, in particular, while all this is going on.
THIERRY: Right.
WILLIAMS: The fact of the matter is, though, that the currency had to fall and we all knew that. And the whole economy and interest rates in Brazil were being held hostage to the currency. You had to keep interest rates very high and therefore hammer the economy in an attempt to hold the currency up.
So in some long-run sense, it's probably good to get it out of the way, and then eventually rates can come down and eventually the economy can recover. So this was a first ugly step in that direction.
THIERRY: The first very ugly step in that direction, indeed, however, necessary, as you say. Where does this leave the International Monetary Fund and the bailout package, if they had already negotiated?
WILLIAMS: Well, I presume they'll try to push forward with that. But you're going to also need some good results from the government in Brazil -- that is they do need to put in place the austerity package, in particular, on the fiscal side that the IMF has asked.
THIERRY: It was an austerity package, but also the IMF plan called for the raising of taxes, or that was, at least, the promise being made to the IMF -- that taxes would be raised, as well. And Brazil does not have a very clean history of being able to collect its taxes, as it is.
WILLIAMS: That's true. And not to mention the fact that any austerity package, whether it's tax cuts or spending cuts, is going to hammer the economy even harder.
THIERRY: Getting blood out of stone here.
WILLIAMS: It's an ugly situation -- we knew that before, but now it's even more...
THIERRY: Well, there was prior knowledge in this. And let's contrast this, if we could, to Russia back in August. A lot of folks say that the crisis in confidence in Russia took many, many people by surprise, which is why when it fell, it fell with such a thud.
We are hearing now that we've been actually talking on this program and many others about Brazil now for at least four months, in terms of what might happen - teetering on the edge of devaluation and a default here. So we've had some warning.
How will this make a difference… in how we deal with Brazil, as opposed to Russia?
WILLIAMS: Yes. In a sense, I think we've kind of been there and done that on this issue. So most major financial institutions, presumably, are not overly exposed to emerging markets; that is they, at least, are aware of the problems and have kept their exposure to a minimum.
So we shouldn't, I think, see quite the same impact on financial markets, generally, this time around. And we already saw the last time, when Asia fell and even when Russia fell, it had absolutely no effect on the U.S. economy.
In fact, arguably it boosted the U.S. economy. Sure, it hammered manufacturing and hammered exports.
But it made interest rates go down and that boosted the rest of the economy.
THIERRY: It did, it did. Although, some would say, though, that that is a temporary solution and others would say that, yes, we've dodged the bullet from Asia, thus far.
But there are still some out there saying we will still feels its effects. It will wash up on shore. In fact, it was a saying that the Asian crisis, the winds were going to blow through Latin America and then onto American shores here.
If that, in fact, is happening in Brazil, does that mean that those ugly waters would be washing up on our shores any time soon?
WILLIAMS: It looks like it's been going on ever since the problem began in Thailand. I mean, we've had, like, six or seven consecutive quarters where people said next quarter GDP growth is going to be weak. And each quartet it comes in stronger than people expected.
The fact is the U.S. consumer is the Atlas on which the world's economy stands, and the U.S. consumer is up the task. He's willing to spend and that keeps the U.S. economy going.
THIERRY: But really, no man is an island. I mean, can it - can every market survive this when we see other markets around here falling precipitously? We can expect to keep our markets intact?
WILLIAMS: I think the short answer is yes, for our economy. That is, the consumer dominates the U.S. economy and that's going to continue to be the case. And to the degree that this causes deflationary pressures and low interest rates, that actually is another boost to the consumer because it gives them even more real income to spend.
So I think the U.S. economy can be fine. The financial markets certainly are going to go and have some upheaval during this. I think the most important problem facing the U.S. markets is the labor costs are rising. That's going to squeeze profits and that's going to hurt the stock market over time. So this may be viewed as an excuse to sell stocks.
But I think the real problem with the U.S. stock market is not Brazil; the real problem with the U.S. stock market is that labor costs are rising, profit margins are getting squeezed and as the economy slows a bit, that problem's only going to get worse.
|
|
|
|
|
 |
|
