Economic Letter

T. S. Eliot wrote “April is the cruelest month.” But April 1998 stands out–at least to people interested in the financial services industry–as a month of stunning changes. At the beginning of April, Citigroup was a word few people had ever heard of, and BankAmerica’s headquarters seemed like a permanent fixture in San Francisco.

The inflation of the 1970s was a time when uncertainty about prices made every business decision a speculation on monetary policy. During that decade, the annual U.S. inflation rate rose in the 5-10% range, compared to a 0-3% range typical of peacetime America.

Health insurance in the United States largely is employment-based: nearly 90% of Americans with private insurance are covered through employer-provided plans. Furthermore, health insurance is the largest nonwage component of total compensation, accounting for 34% of expenditures on voluntary employee benefits and 7% of total compensation (U.S. BLS 1994).

Since the summer of 1997, when many East Asian currencies began to fall, a good deal of attention has been paid to the causes and consequences of exchange rate movements. This Economic Letter sheds some light on these issues by summarizing recent research into the long-run determinants of real exchange rates in East Asia (Chinn 1997).

Since July 2, 1997, when the fall of the Thai baht against the U.S. dollar rang the first alarm about problems in East Asia, numerous economists have forecast the effect of those developments on growth in the United States. Current consensus estimates suggest that the Asian turmoil likely will reduce real GDP growth in the nation by ½ to 1 percentage point in 1998.

In response to recent sharp devaluations in its currency, the Indonesian government recently raised the possibility of adopting a currency board. A standard currency board is a fixed exchange rate regime whose currency is fully backed by foreign reserves; that is, the government pledges to redeem its domestic currency for a foreign “hard currency” (in Indonesia’s case, United States dollars) at a fixed rate, and the full backing of outstanding currency implies that the government has the ability to fulfill this pledge.

While the President and Congress are celebrating (and rightly so) their progress in reducing the budget deficit, everyone involved is well aware that the long-term prognosis for the federal budget remains disturbing. One of the main threats to long-term budget balance comes from Social Security, which promises future retirees much more in benefits than it expects to collect in taxes.

In July 1993, Chairman Greenspan informed Congress that the monetary aggregate, M2, had been “downgraded as a reliable indicator of financial conditions in the economy, ” reflecting the fact that “the historical relationships between money and income and between money and the price level [had] largely broken down.” More recently, however, there have been signs that M2 has resumed a more “normal” relationship with key macroeconomic variables.

As the year begins, the overall economic picture looks pretty good. Both the national and state economies are in the midst of strong, sustained expansions, and inflation remains remarkably well-behaved. But there are some areas of uncertainty to consider as we look ahead – not the least of which is the financial crisis in East Asia.