Saturday, October 24, 1998

Monhollon speaks at Rotary Club luncheon

By SCOTT SCHOLTEN

Staff Writer

The United States should hope for a soft landing from its overheated economy, Jimmie Monhollon, dean of Hardin-Simmons University's College of Business, told the Abilene Rotary Club at a Friday luncheon.

Slower economic growth, around 2.25 percent, "...is the best of all possible outcomes," Monhollon said.

"The economy is clearly overheated," said the former chief operating officer of the Federal Reserve Bank in Richmond, Va.

Though only time will tell, Monhollon said the Federal Reserve will still have to rely on its forecasting methods, use preemptive monetary policy and hope for the best.

In times past, economic forecasters have had preconceptions about how fast economic indicators could grow without exerting inflationary pressures. Such measures include gross domestic product and unemployment, Monhollon said.

"Over the last three years, economists have persistently and systematically underestimated the strength of the U.S. economy," Monhollon said. "Over the last three years, economists have persistently and systematically overestimated inflation."

The world has changed quite a lot, Monhollon said, enough so that we could be living in a "new paradigm economy."

That phrase means a low inflation, high growth economy that has come about through technologies that have increased productivity, Monhollon said.

Monhollon said there may be something to that, but that such increased productivity through technology are probably not solely responsible for annual domestic economic growth of 4 percent since 1996.

Monhollon said there are some economic anomalies that may be responsible.

The U.S. dollar appreciated, commodities prices declined, unions' wage demands took a back seat to demands for job stability, and the United States has experienced reduced inflation in health care costs.

"These are probably temporary factors that will change," Monhollon said.

Prior to the Asian crisis, Fed watchers believed risks were on the upside, or inflationary.

But after the Asian speculative bubble popped, the Fed supposed Asia's financial problems would sufficiently damper the U.S. economy that inflationary pressures weren't quite so threatening, Monhollon said.

As the crisis cascaded from Thailand to Indonesia and so on, there was a flight to quality in which such countries hemorrhaged capital from their financial systems.

Currencies collapsed, which Monhollon called baht-ulism, after the bhat, Thailand's currency.

Under such bahtulism, countries ratcheted up interest rates in order to keep investments in local currency.

When the Russian currency collapsed, a rescue proved too big for the International Monetary Fund to handle, Monhollon said.

That lead to a crisis of confidence that saw substantial swings in global markets, Monhollon said.

To stem the capital outflow from U.S. markets, the Federal Open Market Committee reduced the fed funds rate by 1/2 percent and the discount rate by 1/4 percent, Monhollon said.

No longer is inflation the Fed's main concern, Monhollon said.

Only time will tell whether economists' prognostications will be able to ensure the air is slowly let out of the United State's bubble economy, Monhollon said.

Scott Scholten may be contacted at (915) 676-6737, or scholtens@abinews.com.