Depression. More and more, the dreaded word enters the currency of sober discussion. Wall Street's "Dr. Doom," Henry Kaufman, puts the odds against a global collapse at only 6 to 1 or 7 to 1. Former presidential adviser Alan Greenspan sees it pretty much the same way, perhaps at 10 to 1 or 20 to 1, not the 1,000-to-1 bet against depression that these eminent forecasters would have made just a few years back.
A recent Wall Street Journal survey of opinion concluded that while nothing so bad as the 1930s is in view, some parts of the world's major economies were already in depression, while other sectors could easily slide in the same direction.
Right now, the world is suffering from its most severe recession in nearly 50 years, and Europe is in especially bad shape. For the first time in the post World War II era, the volume of world trade has actually contracted, putting a major burden on the developing countries that must sell their wares to the richer nations in order to survive.
The Organization for Economic Cooperation and Development (OECD) in Paris recently reported that recession is gripping the industrialized nations of the West, even more firmly than in mid-1982. The United States anticipates no more than 2 percent real growth this year--a dismal sort of recovery from the 1982 recession. And Europe expects even less, only 1 percent.
The number of unemployed in the OECD area will rise to nearly 35 million this year, including 11 million or more here, 3 million in Britain, 2 million each in France and West Germany.
"So it looks as if things may yet get worse before they get better," West German central bank President Karl Otto Poehl said in a recent speech. "We face a 'winter of discontent,' such as we have not experienced for quite some time."
A concomitant of the worldwide stagnation has been a serious reversion to protectionism, as each country tries to do what is impossible for all to do simultaneously--increase its exports and curtail its imports. Thus, the much heralded ministerial meeting of the General Agreement on Tariffs and Trade in Geneva last November, which was supposed to reduce trade barriers, turned out to be nearly a total failure. Despite high hopes, most countries retreated further into protectionism.
There was the spectacle of Michel Jobert, the French foreign trade minister, lambasting the United States for "dogmatic liberalism." Jobert was angry that President Reagan was reasserting the principle that protectionism and trade wars eventually lead to the other kind of wars.
France astonished its European trading partners by requiring all customs documents for its imports to be written in French and all products sold in France to bear labels identifying the country of origin.
In addition, Paris directed that all imported video recorders be funneled through the tiny customs office of Poitiers in west central France, far from the main ports.
However Jobert views the United States, Reagan's free-trade principles have been tempered by what his aides call pragmatism. "We have not been purist," admits Treasury Deputy Secretary R. T. McNamar.
From quotas on Japanese cars to European steel, the United States has installed a number of restraints on trade--as a result of the deepening recession and unemployment in the Midwest--but still hasn't retrogressed as far as it has been urged by a half-dozen prominent Democratic candidates for the 1984 presidential nomination.
Exceptionally large trade deficits, especially with Japan, have helped to stimulate protectionist sentiment in the United States. These deficits have arisen because of the extraordinary strength of the U.S. dollar in foreign exchange markets--a reflection of the strength of the U.S. economy relative to West Europe's and of the record-high interest rates during 1981 and 1982.
Economist C. Fred Bergsten, Council of Economic Advisers Chairman Martin Feldstein and McNamar have all predicted that the U.S. trade deficit this year will soar to a new record, perhaps as much as $100 billion. Although the yen has recovered modestly from its low point last year, Bergsten said that it is still undervalued by 20 percent.
Bergsten's prediction is for a worldwide current-account deficit (services as well as merchandise trade) for the United States of $40 billion to $50 billion, three times the prior record.
While other analysts, including those at the central banks in the United States and West Germany, consider that projection too high, a $35 billion U.S. current-account deficit this year is not considered improbable. The lower amount would be enough to help U.S. exports by bringing the dollar exchange rate down considerably, but might also provide a new inflationary thrust here.
As the industrial nations squabble over shares of a reduced world economic pie, it is easy to grasp what has been happening to the less developed ones.
Says World Bank development economist Chandra S. Hardy, "It is time to call a spade a spade: For most developing countries, their debt has become unmanageable. Some of them are in the absurd position of borrowing to pay interest. Therefore, the risk of default in rising precipitously. Right now, 90 cents out of every dollar borrowed by these countries goes into servicing old debt--and for some of them, it's 100 cents."
As the exports of Third World countries have declined, and the prices they get for commodities have plunged, more of them have been unable to meet payments on a world debt estimated at $500 billion to $600 billion, or five times the level of their debt in 1973, before the Organization of Petroleum Exporting Countries launched the first of its two shock waves, running the price of oil up 1,200 percent.
"The present troubled state of the world economy has its roots in emerging inflation pressures in the late 1960s, the twin oil shocks of the 1970s and policy responses that attempted to avoid adjustment to new economic realities," Treasury Secretary Donald T. Regan told Congress at the end of 1982.
About 60 percent of Third World debt is owed to commercial banks, and as more and more have depleted their reserves, they have been unable to meet their payments of interest and capital and have sought rescheduling.
The key Third World debtors are Mexico, Brazil and Argentina, which owe over $200 billion to other countries. A significant portion of that debt will come due within a year. There is little doubt that major banks, many of them American, have overextended themselves in these and other Latin American countries.
As Greenspan suggests, the crisis exists because no one knows whether a rescue operation underwritten by the International Monetary Fund and the major central banks can be organized in time to save the situation. It will require painful austerity programs in the borrowing countries, plus a willingness of the banks, which overeagerly pushed high interest rate loans on the borrowing countries, to stick with their commitments.
A rash pullout by the commercial banks could cause the whole house of cards to collapse. "Well over a hundred banks are loaning to Mexico, for example," Greenspan said. "And a lot of them are short term. There's nothing that says that those loans have to be renewed.
"The danger is that the equivalent of a run could occur, which could create the degree of crisis uncertainty, which would be the type of thing which would lead to a depression."
What can be done to avert a crisis? Belatedly, the United States has joined with its European allies in backing a 50 percent increase in IMF quotas, the deposits of member countries that provide the main source of its lendable funds.
Cynical Europeans suspect that the United States, which all of last year fought such a quota increase, "got religion" because the focus of the debt crisis for the moment has switched from Eastern Europe, where primarily European banks are involved, to Latin America, where American banks are more highly exposed.
Princeton University professor Peter B. Kenen warns that even a 50 percent increase in IMF quotas is not enough for the current crisis, especially if the rich nations delay activating an "emergency fund" for the IMF until 1984. He suggests that IMF reconsider the possibility of borrowing funds from private money markets.
But beyond the repairs that the IMF may be able to manage, something else is clearly needed to rescue the world from economic stagnation.
To stave off what they called the growing threat of "a financial collapse" of the world's economic system, a group of 26 leading economists gathered by the Institute of International Economics here said in a recently published study that the United States and four other major powers must join together to regenerate global economic growth.
Soberly, these economists, representing 14 countries, said there is "no prospect" of an automatic recovery from the current recession and charged there is now "a paralysis of policy" among the major Free World nations.
"There really is some risk of a breakdown in the system, which is apparent when you look at the international dimensions," said Bergsten, director of the Institute.
One of the 26, Morgan Guaranty Trust Senior Vice President Rimmer de Vries, said, "We are all gloomy for 1983. It's pretty much written off. There's nothing much we can do to change 1983. And unless we act now, we may fritter away 1984."
The main recommendation of the Bergsten group was that the United States, Japan, West Germany, the United Kingdom and Canada either take or join in an expansionary move.
"There's a Catch-22 here," economist Kaufman observed wryly last week. "Normally, you'd want to see some expansionary moves in Washington to fight the recession. But when you're talking of a budget deficit that's already $200 billion, how much more expansionary can you make it?"