Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus,americast.usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Tue, Sep 15 1992 Date: Tue, 15 Sep 92 04:23:48 EDT Message-ID: 09-15 0000 BONUS: World reacts to German rate cuts USA TODAY Update Sept. 15, 1992 Source: USA TODAY:Gannett National Information Network The world learned Monday that it's not just Wall Street, Washington or Tokyo that can send financial shock waves ricocheting around the globe. Cuts in two key German interest rates touched off tremors felt in every industrialized nation. WHAT DID THE GERMAN RATE CUTS INITIATE? They kicked off what could be a stunning chain of events that produces stronger economic growth in the USA, Europe and Japan. "And this could go on for the next two or three years," says James Smith, economist and finance professor at the University of North Carolina - two or three years of falling rates abroad and slowly improving economic growth nearly everywhere. Others agree rates will fall further, led by Germany. "More noticeable, lasting interest rate reductions could follow around the turn of the year," predicts Juergen Moellemann, Germany's economics minister. WAS THE GERMAN MOVE INSPIRED BY ANYTHING? The rate cuts also signal that after months of pressure from U.S., European and Japanese leaders, German central bankers apparently have joined a global effort to boost economic growth around the world. "That's a sea change in German thinking," says Wayne Gantt, chief economist at Interstate:Johnson Lane in Atlanta. "The Germans have recognized the weakness in their own economy and the risks their high-rates policies have presented to economic growth worldwide," says Allen Sinai, chief economist at Boston Co. Economic Advisors. "This is an extraordinarily significant event." WILL THIS IMMEDIATELY EFFECT THE U.S. ECONOMY? Before anyone gets too excited, economists also warn that if the U.S. economy is to really get moving, more needs to be done both here and abroad. At most, Monday's events improve the chances that extremely weak U.S. economic growth this year will turn into less-weak economic growth next year. "There are other forces at work that are much more important and which are still hurting the U.S. economy," says Norman Robertson, chief economist at Mellon Bank. Topping that list of problems: the huge debts piled up in the '80s by the federal government, consumers and many businesses. Those old bills are holding back spending now, and weak spending growth is keeping the U.S. economy down. WHAT WERE THE SPECIFIC CUTS IN GERMANY? Monday, Germany's central bank - the Bundesbank - shocked the financial world by cutting two rates it charges German banks for loans. It trimmed the Lombard rate on emergency, overnight loans to 9.5% from 9.75%. The discount rate - charged on most short-term loans to banks - was cut to 8.25% from 8.75%. Both take effect Tuesday. WAS THERE ANY REACTION ELSEWHERE? Other European central banks followed Germany's lead, and financial markets reacted gleefully. With U.S. and Japanese central bankers already pushing down rates in their countries, investors saw the Bundesbank's move as a welcome sign the world's three biggest economies are finally cooperating to boost growth. WHY WAS GERMANY'S MOVE A SURPRISE? The Bundesbank's action was a shock because German central bankers have said for months that they wanted to keep their rates high to prevent a run-up in inflation. German inflation now is running above 3%, at an annual rate. That's unacceptably high in a nation that still remembers the crippling hyperinflation that followed World War I. In theory, high interest rates would help tame inflation by dampening loan demand and slowing the economy. WHAT WAS THE EFFECT IN THE USA? Reaction in the USA to the Bundesbank's surprise was strong. "How do you put into words a very big sigh of relief?" says Jeff Thredgold, Salt Lake City-based chief economist at KeyCorp. "Germany is now moving in tandem with the rest of the world." That's critical, economists say, because the Bundesbank's willingness to cut rates offers a variety of potential benefits for the U.S. economy. HOW DOES THIS BENEFIT THE U.S. ECONOMY? Lower rates in Germany give the U.S. Federal Reserve leeway to push down U.S. interest rates. Before this week, economists say, if the Fed had tried to push rates down, the already weak U.S. dollar likely would have plunged. That's because investors would have dumped dollars to buy German marks or other currencies to invest abroad at higher interest rates. While a weaker dollar is good news for U.S. exports because it makes U.S. goods less expensive abroad, it can be bad news for the U.S. economy. That's because inflation here can be pushed higher by rising import prices. A 100,000-mark German metal press, for example, cost $60,000 a year ago. Today's cost in weaker dollars: $68,000, up 13%. HOW WILL THE FED REACT? Now that Germany has cut rates, the Fed has room to push U.S. rates down if it needs to because the dollar will be less vulnerable, experts say. And some expect the Fed will push rates down in early October. The Fed will cut the discount rate, most likely half a percentage point to 2.5%, predicts James Annable, chief economist at First National Bank of Chicago. He expects the Fed will act soon after the government releases its Oct. 2 report on September unemployment. Some economists expect that report to show a second straight decline in the number of jobs on business payrolls. HOW WILL U.S. EXPORTS BE AFFECTED? If lower rates in Germany help boost economic growth in Europe by pulling down rates across the continent, demand for U.S. exports could pick up even if the dollar strengthens. "This has to help get Europe back on its feet," says Gantt. "And the dollar is still weak enough that if the major European economies pick up, then our exports will benefit." Export growth will eventually - perhaps not for a year, however - help boost U.S. employment, economists say. HOW WILL OTHER COUNTRIES RESPOND? Finally, stronger economic growth in Europe should increase demand for goods made in Japan and elsewhere in Asia. That also would help the USA, if that demand in turn boosts those countries' appetites for U.S. goods. "When the whole world is growing, that helps our exports," says Michael Boskin, chairman of the president's Council of Economic Advisers, "and it also creates a political and economic climate where other things can happen. ... It's easier to reach trade agreements, for example." IN ALL, IS THE CUT A POSITIVE MOVE? Monday's events, then, may be the break the world's economies have been waiting for - something positive to push growth up a notch or two. "This will help, at least in a small way," says Kathleen Cooper, chief economist at Exxon. "It should have come a month or two ago, but it shows Germany is recognizing that things aren't quite right." Bonus Editor: Kate Coughlin. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. 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