Economics, Chapter 6
Macroeconomics, Chapter 6
The Organization for Economic Cooperation and Development (OECD), a Paris-based research and policy group, predicts that growth in industrial economies around the world will slow next year, partly in response to troubles in Asia. OECD has scaled back growth estimates made last March. For example, the group predicted in March that the U.S. economy would be largely immune from economic troubles affecting Asia. But now OECD is predicting annual growth of only 0.9% for the first half of the 1999 and only 1.5% for 1999 as a whole--less than half the growth rate expected for 1998. OECD's darkest outlook was for Japan, where the economy is expected to shrink by 2.8% in 1998 and grow just 0.2% in 1999 and 0.7% in 2000. According to OECD, "The economic situation in Japan is grave" with rising bankruptcies, falling exports, flagging consumer confidence, and reduced availability of bank credit. In October 1998, housing starts in Japan fell 13% below the level from the year before, the 22nd year-over-year decline in a row. The picture for Europe looks far brighter, with a growth forecast of 2.8% in 1998 and 2.2% in 1999. The Internet address for the OECD is www.oecd.org.
(Updated 12/1/98)
Economics, Chapter 13
Macroeconomics, Chapter 13
On November 30, 1998, Deutsche Bank AG announced it would acquire Bankers Trust for $10.1 billion in a deal that would create the world's largest financial institution with combined assets of more than $800 billion. Deutsche Bank is Germany's largest bank, with assets of $675 billion, and Bankers Trust is the eighth-largest U.S. bank, with $156 billion in assets. The combined assets would exceed those of the existing number one bank in the world, UBS AG of Switzerland. Citigroup, currently ranking second in the world, would rank third after the acquisition. Deutsche Bank's goal in the acquisition is to reach markets in North America. In the process, 5,500 employees, mostly in New York and London, would be laid off. The deal, which is expected to close next May, must be approved by New York and U.S. banking regulators. The home page for Deutsche Bank can be found at http://info.deutsche-bank.de/.
(Updated 12/1/98)
Economics, Chapter 14
Macroeconomics, Chapter 14
As noted in the 4/7/98 update, on April 1, 1998, Japan began a long-awaited series of financial reforms, dubbed collectively the "Big Bang," to open up Japanese financial markets to more market scrutiny and greater foreign competition. On December 1, 1998, Japanese regulators begin allowing the nation's banks and life insurers to sell mutual funds. Prior to that, mutual funds could be sold only by stockbrokers, a group not held in high regard in Japan. The $10 billion in savings by Japanese households makes one of the largest pool of savings in the world, second only to savings by U.S. households. More than half of Japanese savings is sitting in bank accounts earning less than 0.5% annual interest. Mutual funds have been around for decades in Japan but have never been very popular. Only 3% of Japanese household financial assets are in mutual funds or stocks (compared to 40% of U.S. household financial assets). That's about to change. Banks and insurance companies have a much wider presence in Japan than do stock brokers. Banks have 15,000 locations and life insurers can rely on a sales force of 68,000 full-time and part-time agents. Banks and insurers also have a much better reputation than brokers. All this should stimulate mutual fund purchases by Japanese households. Japanese banks and insurers have turned to American financial companies for help in selling mutual funds. U.S. companies will not only help manage these mutual funds but will develop training programs for people selling the funds. The mutual fund industry in Japan is expected to at least quadruple during the next decade.
(Updated 12/1/98).
Economics, Chapter 29
Macroeconomics, Chapter 15
As noted in the 6/18/98 update, the U.S. Justice Department and 20 state attorneys general filed lawsuits last May alleging that Microsoft engaged in the pattern of predatory conduct to protect its operating-system monopoly and to extend that monopoly into Internet software. They charged that Microsoft's integration of its browser into Windows was not, as the company claims, solely to make life easier for customers, but was aimed at boosting the browser's market share. Windows software is used on 90% of desktop computers. Microsoft disputes the charges and claims the government is interfering with its right to create new products that benefit consumers.
The trial is now in its seventh week. Frederick Warren-Boulton, an economist hired by the government, testified that Microsoft holds monopoly power because it has the ability to set prices for its products in a way that excludes competitors: "I believe Microsoft has raised prices over the competitive level" because of its lack of rivals. He said that Microsoft had engaged in predatory practices aimed at harming competitors (the company's actions would be considered illegal only if it is found to possess monopoly power). Warren-Boulton argued that Microsoft's actions were "predatory" because they were aimed not at adding revenue but at winning the browser war. For example, Microsoft's decision to give away its Internet Explorer browser sacrificed revenue but was viewed as a way of beating Netscape. With Microsoft's browser on more than 60% of new Internet users' computers, the company may become dominant in the browser market, he said.
Microsoft, for its part, characterized itself as an aggressive but legal player in a fiercely competitive industry. Lawyers detailed Microsoft's frequent efforts to improve its operating system software all the way from MS-DOS to Windows 98. They said that the product would not have such a huge share of the market if it failed to improve quality and value with each new version. They argued that high market share "does not begin to reflect the intense competitive dynamic in the software industry." Even such a lead is "susceptible to rapid deterioration should the market leader fail to innovate at a rapid and competitive pace." The company said it planned to invest $3 billion in fiscal year 1999 on research and development.
Bill Gates was not among the 24 witnesses scheduled to testify, though he was interrogated by government lawyers for 20 hours during deposition on video tape and that tape has been used to support the government's case. The federal judge presiding at the trial said, "I think it is evident to every spectator that, for whatever reasons, in many respects, Mr. Gates has not been particularly responsive to his deposition." The trial is ongoing. For a library of New York Times articles about the case and for a discussion forum on the case, see http://www.nytimes.com/library/tech/index-microsoft.html.
(Updated 12/1/98)
Economics, Chapter 10
Macroeconomics, Chapter 10
Consumer spending in the largest component of aggregate spending, accounting for about two-thirds of the total. Consumption depends primarily on household income. But at any given income level, the willingness to consume depends on several factors including household wealth, the interest rate, and consumer expectations. Look what's been happening in Japan. A nine-year stock-market slide has cut the average value of shares by two thirds, taking a big bite from the wealth of Japanese households. What's more, many Japanese banks are in trouble because of real-estate loans that soured as the country's booming real estate market collapsed. The sharp reduction in consumer wealth coupled with an erosion of consumer confidence in the future have cause Japanese households to try to save more and consume less. Thus, their consumption function has shifted down and their saving function has shifted up.
The drop in consumption has reduced aggregate demand, triggering Japan's worst economic slide in decades. Retail sales dropped 3.7 percent in July 1998 from a year earlier, the 16th monthly decline in a row. In July, for example, car sales dipped 6.4 percent, and electronics purchases 4.8 percent. Japanese output has now declined for three quarters in a row.
Aggressive efforts by bank regulators to clear the books of bad debts would likely result in the insolvency
of some major banks. Such a move would help the long-term prospects for the economy but would cause greater
instability in the short run. Japan, the second largest economy in the world (after the United States),
is, by far, the largest economy in Asia. A weakened Japan hurts the already troubled economies across
Asia, since Japan is a customer for their exports.
(Updated 9/2/98)
Economics, Chapter 35
Macroeconomics, Chapter 20
Microeconomics, Chapter 22
Once the ruble was allowed to float, its value quickly dropped relative to the dollar. Panicky Russians stormed banks trying to withdraw their rubles-either to spend them before prices increased more or to convert them into dollars. The spike in demand cleared store shelves of goods, particularly durable goods. One automobile factory ran out of cars. Some stores, frustrated about the what price to charge, simply closed their doors.
Russia's road to a market economy has been rocky but now seems to be winding aimlessly. Seventy years of Communism suppressed two necessary features of a market economy-private property and entrepreneurship. Even after reforms legalized private businesses, local governments imposed licensing rules and other restrictions that choked the life out of most new firms. Since mid-1994 the number of enterprises in Russia has remained flat. The Russian system not only stifled new business, it helps large, bankrupt businesses survive. Some inefficient Russian factories, many of which employ more than 10,000 workers, continue to make stuff nobody wants, such as steel, even though these firms can't pay wages or taxes. These dinosaurs stay in business through a complicated and inefficient barter system-what has become known as Russia's "virtual economy." Russia is now ruled largely by an oligarchy-a small group of wealthy individuals exercising control in their own interest.
Even before the banking and ruble crisis, the International Monetary Fund had agreed to provide Russia
$23 billion in aid. In return for the relief package, Russia agreed to IMF demands that the government
begin collecting taxes, clean up the banks, and push market reforms. Russia's recent actions may have
violated the terms of that agreement and further payments could be jeopardized.
(Updated 9/2/98)