International Trade and Finance: A North American Perspective

By Khosrow Fatemi | Go to book overview

1
INTRODUCTION

KHOSROW FATEMI

On October 19, 1987, the New York Stock Exchange plummeted and the Dow Jones industrial average lost more than 508 points or 22.6 percent of its value. The reaction of other major international stock markets was quick and very similar. Within two working days, all indexes of other stock markets registered drops of similar magnitude: 17.0 percent in Tokyo Nikkei, 21.6 percent in London (Financial Times-30), 14.0 percent in Zurich (Credit Suisse Index), and 11.9 percent in Frankfurt.

The two most important and almost unanswerable questions raised by this astonishing plunge were (a) What caused the New York Stock Market to lose almost one-quarter of its value in one day; and (Co) What repercussions does it have for the future? Most of the many answers given to these questions, in one form or another, included the role of two imbalances in the U.S. economy--the deficits in U.S. international trade and the federal budget. By all accounts, at least part of the blame (reason) for the "crash of 1987" lies in the inability of the U.S. economy to balance its trade, and the inability or unwillingness of the federal government to balance its budget.

There are no questions about the "internationality" of the trade deficit. And the budget deficit, even though seemingly domestic, has its international roots and, more significantly, its international implications. For many reasons, the U.S. economy has become the centerpiece of the industrial world upon which the rest of the world relies for leadership, guidance, and support. To fulfill this role, the U.S. economy must itself be at least reasonably healthy. A federal budget deficit of $150 billion to $200 billion per year can hardly be an indication of economic health and viability, or encouraging to other economies.

An indication of how international the U.S. federal deficit has become was given during the "Budget Summit" (the negotiations between the Reagan

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