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The Bursting of the Technology Bubble: International Implications

The Bursting of the Technology Bubble: International Implications. Presentation at the Hong Kong Institute for Monetary Research Hong Kong, 31 May 2001 William R White Economic Adviser and Head of the Monetary and Economic Department Bank for International Settlements. Overview.

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The Bursting of the Technology Bubble: International Implications

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  1. The Bursting of the Technology Bubble:International Implications Presentation at the Hong Kong Institute for Monetary Research Hong Kong, 31 May 2001 William R White Economic Adviser and Head of the Monetary and Economic Department Bank for International Settlements

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

  3. Recent developments: real (1) • A sharp slowdown in the US. • Possible recession in Japan. • Some deceleration in the euro area. • Knock-on effects elsewhere.

  4. Recent developments: real (2) • Slowing down in many sectors. • Including investment. • With international effects.

  5. Recent developments: nominal • Inflation generally well behaved. • But recent uptick in US and euro area. • Although not elsewhere.

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

  7. 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).

  8. 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.

  9. Some historical context: facts (2) • The equity boom preceding the bust? • Due to easy policy? • And credit excesses?

  10. Where to from here? • The New Era paradigm. • The Keynesian paradigm. • The Austrian paradigm.

  11. 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.

  12. The Keynesian paradigm • Aggregate demand has outstripped supply. • Postwar slowdowns have all been “hard”. • Possible stagflation could make it worse.

  13. The Austrian paradigm • Many financial imbalances remain. • Many macro imbalances remain. • Possible financial vulnerabilities. • And the need for rebalancing.

  14. Possible policy responses • Given a sharp rebound? • Given a shallow recession? • Given a deep recession?

  15. 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.

  16. 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.

  17. 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.

  18. But cheer up, it may never happen!

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