The Bursting of the Technology Bubble:International Implications

Presentation at the Hong Kong Institute for Monetary ResearchHong Kong, 31 May 2001

William R WhiteEconomic Adviser and Head of the Monetary and Economic DepartmentBank for International Settlements

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Overview

• Recent developments.• Some historical context.• Where to from here?• Possible policy responses?

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Recent developments: real (1)

• A sharp slowdown in the US.• Possible recession in Japan.• Some deceleration in the euro area.• Knock-on effects elsewhere.

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Recent developments: real (2)

• Slowing down in many sectors.• Including investment.• With international effects.

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Recent developments: nominal

• Inflation generally well behaved.• But recent uptick in US and euro area.• Although not elsewhere.

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Recent developments: financial

• Higher then lower policy rates.• Lower then higher long rates.• Falling equity prices.• Widening credit spreads.• Pushing on a string?

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Some historical context: facts (1)

• Precedents pre-World War I.• Each associated with a New Era.• Back-to-the-future through deregulation

and globalisation.• Similarities and differences between

Japan (1985-90) and the US (1995-2000).

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US and Japanese bubbles: comparison and contrast

Similarities DifferencesAcceleration of GDP Opening of US economy

(globalised investment goods & Asia’s role?)

Acceleration of labour productivity Real estate price inflation (worse in Japan)

Decline of CPI inflation Decline in private savings (worse in the US)

Acceleration of private investment Private capital flows (Japan out; US in)

Stability of real interest rate Household & corporate debt buildup (worse in Japan)

P/E peak (w/ adjustment for JP crossholding)

Equity price inflation

Real appreciation

Fiscal improvement

Deterioration of current account(not shown in the data, but at end of 1980s inJapan)

Household savings decline

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Some historical context: theories• Hayek, Haberler and the Austrian

School.• Credit expansion and New Era

optimism...turns to “excessive optimism”...profits and shares collapse...leading to distress in the financial system.

• And all without inflation.

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Some historical context: facts (2)

• The equity boom preceding the bust?• Due to easy policy?• And credit excesses?

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Where to from here?

• The New Era paradigm.• The Keynesian paradigm.• The Austrian paradigm.

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The New Era paradigm

• New technology has pushed up potential output and profits.

• Buoying share prices, consumption and investment.

• And giving better control over inventories.

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The Keynesian paradigm

• Aggregate demand has outstripped supply.

• Postwar slowdowns have all been “hard”.

• Possible stagflation could make it worse.

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The Austrian paradigm

• Many financial imbalances remain.• Many macro imbalances remain.• Possible financial vulnerabilities.• And the need for rebalancing.

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Possible policy responses

• Given a sharp rebound?• Given a shallow recession?• Given a deep recession?

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Given a sharp rebound

• Inflation in the US could rise: energy, ULC and the dollar.

• Underlying imbalances could worsen.• Could imply the need for tightening.

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Given a shallow recession

• Inflation less of a problem.• Imbalances are resolved over time.• Unpleasant, but the best of the possible

alternatives.• Policy could stay easy for an extended

period.

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Given a deep recession

• Restructure the supply side and recapitalise banks as quickly as possible.

• Use monetary and fiscal policies to back in aggregate demand.

• Both required because Hayek and Keynes both had a point.

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But cheer up, it may never happen!