jonogden@scmp.com FORGET THE United States economic 'miracle' of the late 1990s. It was just another common or garden credit bubble similar to that experienced by Japan in the 1980s, from which its economy has never recovered. If you can accept that, then you are half way to getting your head around the dire situation the world economy is in - or at least the way that independent British economist Andrew Hunt sees it. The easy monetary policy of the Federal Reserve in the late 1990s allowed corporate America to go on a borrowing binge. US companies indulged in their own version of Japan's 1980s 'Zaitech' era - by gorging themselves on financial assets. They bought shares in each other and their own in corporate buy-backs, all at sky-high prices. They spent as much as 10 per cent of gross domestic product in 1999 on credit-financed purchases of paper assets, much more than on their core operations. The Fed pricked this bubble when it raised rates in 1999-2000 and the economy began unwinding the debt mountain. The Fed's rate cutting campaign last year was only enough to cushion the decline in the US economy until it really turned on the monetary taps after September 11. The US economy had close to US$900 billion in fiscal and monetary stimulus in last year's final quarter, getting on for 10 per cent of GDP, Mr Hunt estimates. That caused a brief reprise in the Zaitech era, or at least a pause in corporate retrenchment, which lasted only until this spring when the mirage of recovery caused expectations of interest rates to rise. Those higher rates and the accounting scandals have closed off the access to credit once again and corporate America is firmly back in deleveraging mode. It is bidding to turn negative cash flows back to positive by cutting costs, jobs and inventories - all to the short-term detriment of the economy. This can be seen in the second-quarter GDP number released last week which, excluding defence and inventories, was actually negative. This is where the huge overhang of the current account deficit, standing at 4.5 per cent of GDP, finally has to be dealt with. There's a hard way and an easy way, Mr Hunt says. The easy way is that Europe, Japan and Asia realise we are in a whole new ball game and they can no longer rely on the US as a growth locomotive. What they have to do is loosen monetary policy, stimulate domestic demand, and take on board a lot more US exports. The hard way is that the non-US world does not heed the signal of the weak US dollar and keeps monetary policy where it is. The result will be a global recession, Mr Hunt predicts. Hong Kong can only sit passively on the sidelines and hope the rest of the world gets it right. Jake van der Kamp is on holiday Graphic: jake06gbz
