Why Markets Tumble Together in Wake of Ruble Devaluation, Economists Are Finding There's No Such Thing as Small in a Global Economy
David R. Francis, writer of The Christian Science Monitor, The Christian Science Monitor
"Bonfire of the currencies." "Meltdown!!!" "Fear of falling." "Global margin call."
Economists and journalists are using such terms to describe the plunge in currency values and stock market prices that rumbled around the globe in the wake of Russia's recent devaluation of the ruble.
Financial fears are spreading. But behind the concerns - some real, some imagined - lie important lessons about the growing interdependence of the world economy on the cusp of the 21st century.
One is that, no matter how bush league one part of the world's economy may seem, it can still cause financial panic elsewhere in an era when money and capital flow around the globe at the click of a mouse.
Take Russia. It buys less than 1 percent of US exports - about the same as Denmark. Yet it is causing worries from Germany to Brazil. Indeed, all the emerging economies of the world account for only about 17 percent of global output, and not all these are in trouble. Japan, whose economy is in the doldrums, makes up about 18 percent. So at most, one-third of the world's economy is in recession.
"The entire globe was in recession in 1974-75," writes Michael Cosgrove, a Dallas economist, in a monthly report, The Econoclast. "The world didn't end."
Most economists still expect that Western Europe and North America - where economies are still growing and which account for two- thirds of world output - to prevent a global recession.
But there is concern that Russia's woes, in particular, could spread to Latin America and beyond. Economists offer several explanations for the turmoil:
* Fear What's going on globally is, in effect, like a run on the bank. Losing confidence, investors in the United States, Europe, and other countries have rushed to take money out of stock markets in both developing and industrial countries. They have been putting it in more stable financial havens, such as government and corporate bonds in the US.
Wall Street is calling it "a rush to quality." In the US, the Dow Jones Industrial Average was down 6 percent last week. In London, stocks fell 5.5 percent, in Mexico 7.6 percent, in Warsaw 16.7 percent, in Manila, 9.7 percent. Japanese stocks lost $241 billion in value, an amount exceeding the entire output of Russia.
Unlike in a nation, there is no central bank for the world to act as "lender of last resort," capable of creating vast amounts of credit to cover withdrawals in a run on financial institutions. The International Monetary Fund (IMF) can put together rescue loan packages for a nation. But its resources are limited.
* An excuse. Many US investors are really more concerned about other factors than Russia. They regard stocks as overpriced, but were happy riding along in the bull market. Now they are concerned that emerging market and Japanese economic troubles will spread to Latin America and hit the US economy harder. The Russian devaluation acted as a trigger for those who wanted to pull out anyway.
"Those who believe that the US is somehow immune to global contagion will be unpleasantly surprised," says Bruce Steinberg of Merrill Lynch & Co. in New York.
Further, they see corporate profits slipping. The Commerce Department last week said after-tax profits slid 1.5 percent in the second quarter from a year ago.
* A fault in capitalism. When the present international monetary system was set up in 1944 at Bretton Woods, N. …