Paul Westpheling: The financial markets have always been preoccupied with the state of the economy; but this year it seemed that investors were more skittish than they have been in quite a while, and they had every reason to be. After vigorous and unsustainable economic growth during the first six months of the year, the economy slowed down sharply during the third quarter. That brings up the possibility of another recession to some, but not to economist Alice Rivlin of the Brookings Institution …
Alice Rivlin: "When a recession is about to happen, normally one sees lots of signs: one sees inflation heating up, and interest rates rising, and labor shortages, and industry pressing against capacity. We have seen none of those things."
Paul Westpheling: Moderate economic growth should mark the economy in 1985, says Rivlin.
The former head of the Congressional Budget Office worried, too, about the budget deficit and how it will affect the economy if it isn't brought down in 1985. She says the Administration, whether it likes or not, is going to have to cut spending and ask for a tax increase …
Unknown Speaker: "Because it would be too painful to take all of the deficit out of the spending side, we would have to cut deeply into defense programs that are already on the books and into spending programs that people are counting on."
Paul Westpheling: Rivlin, who is now Director of the Economic Studies Program at Brookings, says, "We have put ourselves in the situation where we are mortgaging our future because of the budget deficit".
I'm Paul Westpheling in Washington.
Roger Giddens: 1984 was supposed to be the year that the dollar got its comeuppance; it didn't happen. Instead, the dollar set new records against the British pound, the French franc and several other major European currencies.
Most leading analysts were forced to eat crow. They had been predicting that the dollar was sure to fall and fall dramatically. The uncanny euphoria and optimism generated by the Reagan reelection campaign helped keep the dollar strong. Foreign investors were infected by the mood, and they continued to plow their cash into the U.S. economy. The American Treasury encouraged the inflow by offering a series of Treasury notes on the Euro bond market. The dollar even continued to defy the experts' predictions when, after the election, the almost-predictable hangover set in. The economists took another look at the statistics and concluded that the economy was teetering on the edge of recession again.
In the meantime, gold has been suffering. It's been lackluster all year, bearing out the rule of thumb about precious metals: to wit, prices decline along with interest rates.
The international banks weathered the year without another credit crisis with the Third World. Still, there were frayed nerves when Argentina played chicken, flirting with default until its creditors gave in.
And of course, no year would really be complete without a run-in between the United States and the common market. Late in November, the Reagan Administration banned all shipments of European tube, steel and piping. The EC tried at the last minute to head off the embargo by offering to cut its exports in half. The answer from Washington was, no, thanks.
Roger Giddens, London.
