Bubbleology

Bubbleology Bubbleology “Bubbleology” is a term coined by Kevin Hassett that describes the all-too-common stock market roller coaster ride. A ride that, for a while, seems destined to never end, only later to tumble miserably off the unfinished track. History is no stranger to bubbles. The earliest report of such phenomena, for instance, occurred in the early seventeenth century, at the height of the Dutch Tulip Mania. The popularity of tulips grew so much that people began abandoning their jobs and squandering their life savings to grow them. Eventually, they became such a marketable product that they were traded publicly, as investments, in what was known as the Dutch Tulip Bulb Exchange (Tarses). One Dutchman was even reported to have paid “two wagon loads of wheat, four loads of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four barrels of beer, two barrels of butter, 1,000 pounds of cheese, a marriage bed with linens, and a sizable wagon to haul it away,” for one tulip -- a transaction not unlike many others at the time (Tarses). Warnings ignored, the value of tulips began to inflate at a remarkable rate. Concerned, the Dutch government issued a decree on April 27, 1637, that declared tulips and tulip bulbs products, not investments, and that they had to be bought and sold on that basis (Tarses). With no new money coming into the market to further inflate the bubble, and with banks calling in their tulip loans, tulip prices collapsed overnight and the bubble burst. Although we might find the Tulip Mania humorous, recent history has seen similar devastation. In an alarming course of events in 1907, the entire New York Banking Institution collapsed. At that time, and in many cases today, banks did not maintain as much cash as their account holder’s had deposited (Moen). Solvency refers to the relationship between assets and liabilities. If an institution has more liabilities than assets, it is referred to as insolvent. In 1907, there was widespread fear that banks were insolvent, leading to massive, simultaneous withdrawals, eventually causing New York banks to run out of money (Moen). Getting one’s money literally became a first-come first-serve situation. The effects of the New York banking panic were widespread. Call money on the New York Stock Exchange (NYSE) was nearly unobtainable (Moen). Call money was money lent for the purchase of stock equity, with the stock itself serving as collateral for the loan. The lack of Call Money later led to the New York Clearing House issuing loan certificates as an artificial way to increase the supply of currency available to the public. This later lead to the Federal Reserve System we employ today (Moen). Perhaps one of the most notable and significant bubbles in history was the boom of the 1920’s. After World War I, growth in technology such as automobiles, radios, and the increased availability of electricity fostered a flourishing market (Smant). Facilitated by the increased usage of installment credit, a short recession in 1927 ended and industrial production jumped 25% causing the NYSE to reach 381 points, compared to 100 in 1926 (Smant). Beginning October 24th, frantic selling took place as investors realized the equitability of industry was not realistic. By the end of Black Tuesday (Tuesday, October 29), stock prices had fallen to 145 (-62%), which led to the inevitable Great Depression (Smant). By June 1932 prices had reached there lowest at 34 (-91%) (Smant). Today we are amidst the so-called dot-com bubble. The proverbial roller coaster has soared to never before imagined heights. With no end in sight, and the wheels supposedly firmly planted on the track, an influx of innumerable sums of money is continually dumped into the market. Determined to maintain growth, corporate executives take questionable accounting measures, and analysts stare blindly at an economy unequal to that of its market value. History none the wiser, the market continues to grow beyond its equitable value. Emerging from market “pipe dreams,” scandal and market reality send the economy spiraling into recession. The once “un-endable” track had ended. But as with all bubbles, the scandalous are brought to justice, further legislation is enacted, and the market once again regains it strength – only a little wiser. The dot-com crash has seen one of the most aggressive market declines since the Great Depression. The market cap has seen a more than $7.7 trillion decline since March 2000 (“Eyes on the Market”). Ninety percent of stock funds have lost money (“Eyes on the Market”). Two hundred and seventy earnings were restated in 2001, compared to 120 in 1997 (“Eyes on the Market”). “In March 2000, 500 shares…would’ve bought a Porsche 911 Carrera. Today, they’ll buy a 1990 Dodge Omni Hatchback with 100,000 miles [and no air-conditioning],” CNN once compared of JDS Uniphase, a dot-com fiber optic component company now valued around a dollar (“Eyes on the Market”). The first scandal uncovered was Enron Energy Corporation. With revenues exceeding $101 billion in 2000, Enron is the worlds leader in electricity, natural gas, and financial and risk management services (“Enron: Company Snapshot”). Divided into three subsidiaries: Wholesale Services, Energy Services, and Global Services, Enron maintains more than $47.3 billion in assets (“Enron: Company Snapshot”). Headquartered in Houston, Texas, Enron controls more than 30,000 miles of pipeline and 15,000 miles of fiber optics (“Enron: Company Snapshot”). Formed in July 1985 out of a merger between Houston Natural Gas and InterNorth of Omaha, it has filed the second largest bankruptcy in history (“Enron: Company Snapshot”). Accused of misleading accounting by the Justice Department, Enron allegedly reported more than $1 billion in losses as capitol expenditures to investors (“Enron Paid Managers”). Arthur Anderson, Enron’s accounting firm, tasked with auditing the corporation, has been convicted by a jury of obstructing justice by shredding thousands of documents pertaining to the finagled accounting. While maintaining thousands of offshore corporations to hide losses, Ken Lay and Jeffrey Skilling, former executives of Enron, sold an aggregate of more than $168 million in stock options (“Enron Paid Managers”). In addition to Lay and Skilling, 29 key executives sold seventeen million options valued in excess of $1.1 billion over the past three and a half years (“Enron Paid Managers”). One hundred and forty top managers also received more than $744 million in bonuses leading up to the bankruptcy (“Enron Paid Managers”). All the while, over 4200 employees have been terminated in an effort by a reorganization team to keep the company afloat (“Enron Paid Managers”). As a result of the scandal, Enron’s shares have plummeted to near nothing and the corporation has been de-listed from the NYSE. Analysts rating Enron’s bond status at Junk Bond accuse the corporation of having a board too closely tied to the corporation (“Eyes on the Market”). The dot-com plunge has also seen the largest bankruptcy in US history. In July 2002, WorldCom Corporation filed for Chapter 11 protection in Manhattan, New York (Moore). WorldCom, whose accounting firm is also Arthur Anderson, is accused by the Justice Department of hiding more than $3.85 billion in losses as expenses (Moore). The once sprawling telecommunications company owns MCI Telecom, the world’s second largest consumer long-distance company, and UUNet, the “Backbone of the Internet,” with more than 3,800 Points of Presence (POPs) (“About WorldCom”). The company, whose stock price was 64.50 in June 1999, now has more than $65 billion in liabilities (Moore). Bernie Ebbers, WorldCom’s former Chief Executive Officer (CEO) founded the corporation in 1983 (Moore). Ebbers, who took the corporation through an acquisition binge, buying more than 60 corporations throughout a fifteen-year period, resigned in April 2002 (Moore). John Sidgmore, interim CEO, explained that WorldCom “is a very key component of our nation’s telecommunications and security infrastructure (qtd. in Hill).” He added, “At the end of the day, this really will be business as usual. We don’t think that there will be any significant impact on the employees and vendors, for that matter, and we should have plenty of cash to make it. (qtd. in Moore)” WorldCom is scheduled to terminate 17,000 employees, or 20% of its work force in the coming months (Moore). Expecting to emerge from bankruptcy in twelve months, WorldCom recently secured more than $2 billion in credit from Citibank, JP Morgan Case, and GE Capitol (Moore). Sigmore responded to the Securities and Exchange Commission (SEC) investigation with, “[We’ll help] find the bad guys, punish the bad guys, [but] leave the company alone (qtd. in Moore).” Adding that, “Chapter 11 enables us to create the greatest possible value for our creditors, preserve jobs for our employees, continue to deliver top-quality service to our customers, and maintain our role in America’s national security. (qtd. in Hill)” Cracking down on corporate fraud, the SEC and the Justice Department have filed a number of charges against prominent corporations. On June 25, 2002, a jury found Arthur Anderson LLP guilty of obstructing justice by shredding Enron documents (“Eyes on the Market”). A. Alfred Taubman, former Chairman of Sotheby’s Auction House, was sentenced in April to one year in prison after price-fixing with archrival Christies (“Eyes on the Market”). Merrill Lynch paid $100 million to settle a New York State charge that its research analysts hyped stocks they privately ridiculed (“Eyes on the Market”). Nasdaq fined Piper Jaffray Corporation for allegedly telling a pharmaceutical company that the securities firm would drop research coverage if it was not used as a stock offering underwriter (“Eyes on the Market”). Xerox was forced to restate earnings to reflect $1.4 billion less in profits over the past five years (“Eyes on the Market”). The company was also fined $10 million by the SEC. A number of executives have also been arrested amidst the scandal. Scott Sullivan, WorldCom’s former Chief Financial Officer (CFO), was arrested on charges of insider trading and securities fraud (“Eyes on the Market”). ImClone’s former CEO Sam Waksal was also arrested on charges of insider trading (“Eyes on the Market”). John Rigas, founder and former CEO of Adelphia, the world’s sixth largest cable-television company, allegedly looted the it to pay for luxury condos, a golf course, and numerous personal investments (“Eyes on the Market”). Dennis Kozlowski, the former CEO of the problem-laden Tyco was arrested on charges of evidence tampering and tax evasion (“Eyes on the Market”). The recent emergence of corruption has sent the business world into an ethical quagmire. From the oversees bribery scandal of the 1970’s, to the defense-industry overcharging scandal of the 1980’s, to the book-cooking scandal of today, history has seen its share of vices. “At the heart of the business-ethics movement is the reaction to the mistaken belief that business only has responsibilities to a narrow set of its stakeholders – namely, its stockholders (qtd. in Berlau),” explains Michael Hoffman of Bentley College. Referring to a report that Robert K. Jaedicke, graduate and dean of the prestigious Stanford Business School, calimed not to understand Enron’s deceptive accounting practices when he testified before Congress, Eugene Heath, Associate Professor of Philosophy at the State University of New York at New Paltz responded when asked if there should be more business-ethics courses in universities said, “Given the way a lot of those are taught, my answer is probably not. A lot of business-ethics courses cover topics such as drug testing and privacy, affirmative action, and global business regulations. These are interesting and worthy topics, but I don’t think they affect as many individuals in their day-to-day lives as do another set of questions. The other set of questions, which is our focus, is on virtues and vices in the everyday business environment (qtd. in Berlau).” In the 1980’s, business bashing was rampant at Ivy-League schools. Kenneth Goodpaster, head of business-ethics at the University of St. Thomas College of Business explained, “The party line was…I wouldn’t go so far as to say Marxist or socialist, but it was certainly highly critical of capitalism. The attitude of a lot of liberal-arts faculty towards business and towards business-professional education was a certain level of disdain, somewhat borne in a liberal mind-set. Anti-business sentiment was particularly strong in philosophy departments, where many business ethicists start their careers (qtd. in Berlau).” “The pervasive view among faculty that successful business are, by their very nature, corrupt is itself corrupting the students in business-ethics classes. It encourages a cynical attitude towards ethics. Either you say ethics is going to get in the way of meeting the bottom line, so to hell with ethics, or you take on ethics as a matter of duty (qtd. in Berlau),” added Stephen Hicks, chairman of the Philosophy Department at Rockford College. “Business-ethics professors need to stress that business is a creative endeavor, like art or music, in which integrity must play a central role. I think business, as when pursuing science, education, or art as a profession, is inherently moral, with ethics as an integral part of doing good business (qtd. in Berlau),” Hicks suggested. “Business and ethics should be thought as adjuncts to each other, not as enemies (qtd. in Berlau).” Milton Friedman argues that the field of business ethics distracts executives from their obligations to make money for shareholders. “I don’t think there is such a thing as business ethics. A business can’t have ethics any more than a building can have ethics. Only people can have ethics. I don’t believe the university is the place for that – family and elementary and secondary schools are. Unfortunately, in elementary and secondary schools, the extent to which [ethical education] is occurring has been very much less (qtd. in Berlau).” A large part of the moral dilemma was the need to drive up stock prices as more and more executives depended on stock options as part of their salary. The Revenue Reconciliation Act of 1993, signed into law by President Clinton on August 10, enacted perhaps the greatest tax increase that century. Flying in the face of the 1986 Regan Tax Reform Act, the 1993 act returned to higher marginal tax brackets, some as high as 40.79% (“History of the Income Tax”). The new law created two new tax brackets: (1) a 36% bracket for taxable incomes of $140,000 for joint, and $115,000 for individual filings, and (2) a 39.6% bracket for both individuals and joint filers through a 10% surcharge on taxable incomes over $250,000 (“Tax Publications”). The capitol gains tax, however, remained at 28%. By expanding taxes on larger incomes, companies began seeking alternatives to compensate their higher-salaried employees. Stock options, which give an employee the right to buy shares at a fixed price today (usually at the current market price, but sometimes lower) for a defined number of years into the future, became the option most often selected (“Employee Ownership”). By making salaries dependent upon a stock’s growth, executives often fudged earnings to ensure future personal profit. A 1996 Congressional Joint Economic Committee reported, “High marginal tax rates discourage work effort, savings, investment, and promote tax avoidance and tax evasion. A reduction in high marginal tax rates would boost long term economic growth, and reduce the attractiveness of tax shelters and other forms of tax avoidance (qtd. in “Tax Publications”).” In an effort to counter further corruption, the Federal Government enacted the Sarbanes-Oxley Act of 2002. Entered into law by a staggering bipartisan 423-3 House vote and a 99-0 Senate vote, it aims to counter corporate fraud and stiffen penalties for corporate crooks (“Book Cooking”). The law creates an oversight board to monitor the accounting industry, calls for an immediate disclosure of stock sales by company executives, and prohibits companies from giving personal loans to top officials (“Book Cooking”). “Those who deliberately sign their name to deception will be punished,” cautioned President Bush. “Today, I sign the most far-reaching reforms of American business practices since the time of Fraking Delano Roosevelt…This law says to accountants: ‘The high standard of your professional will be enforced without exception.’ The auditors will be audited, the accountants will be held to account (qtd. in “Book Cooking”).” Although existing legislation and penalties were already place, the new legislation was largely an effort to raise the confidence of battered investors and stimulate economic growth. As with all bubbles throughout history, the scandalous were brought to justice, new legislation was enacted to counter further corrupt activities, and the economy is on the road to recovery. It is unfortunate, however, that we have learned so little from history’s debacles. Jeffery Pfeffer of Stanford Business School cautions that “until people realize that capital markets are not as all-knowing as everyone thought, that companies have to be managed for customers and employees, not just for investors, that people who fleece investors ought to be treated no differently than people who hold up a bank – until then, I don’t think things will really change very much (qtd. in Berlau).” Bibliography Works Cited About WorldCom. WorldCom Corporate Website. Nov. 2001. . Berlau, John. “Is Big Business Ethically Bankrupt?” Insight on the News. 25 Feb. 2002. . Book Cooking. Cable News Network Online. 31 Jul. 2002. . Employee Ownership. The National Center for Employee Ownership. Feb. 2002. . Enron: Company Snapshot. Enron Corporate Website. 22 Jul. 2001. . Enron Paid Managers. Cable News Network Online. 17 Jun. 2002. . Eyes on the Market. Cable News Network Online Money. 1 Aug. 2002. . Hill, Patrice. “Bankrupt WorldCom called a security risk.” The Washington Times. 3 Jul. 2002. . History of the Income Tax in the United States. InfoPlease.Com, Courtesy of Ernst & Young. . Moen, Jon. “The Panic of 1907.” EH.NET Encyclopedia. 15 Aug. 2001. . Moore, Matt. “WorldCom bankrupt.” The Honolulu Advertiser.com. 22 Jul. 2002. . Revenue Reconciliation Act of 1993. Tax Publications. . Smant, D.J.C. “Famous First Bubbles: The Stock Market Crash of 1929.” 10 Aug. 2001. . Tarses, Mark. “Tulip Mania.” Jan. 1999. . The fact that Enron had given so much money to Republicans and Democrats in Congress and to the Clinton and Bush administrations, led the U.S. House of Representatives and the U.S. Senate to pass a Campaign Finance Reform bill that President Bush announced he would sign. Supporters of reform hope that the bill will result in taking in the big money of campaigns and lawmaking and in less cynicism among voters. Opponents plan to take the reform bill to the Supreme Court because they see it as a violation of freedom of speech. More related to economic policy changes is what will happen in the field of financial regulation and pension regulation. Enron lost billions trading energy derivatives, which many experts believe should be regulated. We will see if the scandal is big enough for that to occur. Investors in Enron who lost billions and workers whose 401(k) pensions were uninsured are suing the bankrupted company. Enron workers lost a billion in their pensions with the collapse of Enron, as did other worker pension funds throughout the country. Although it will be months before the NBER officially dates the end of the current recession, there are more and more favourable signs occurring each day. Industrial production has increased in January and February of 2002. Now the question is how strong the recovery will be or if it will falter. In some ways, there is no change in the politics of economic policymaking in Washington. The Bush, Jr., administration has just put high tariffs on some steel products from some countries to protect the U.S. steel industry. Republicans in the 2002 congressional elections and President Bush in the 2004 election need the votes in the steel-producing states of West Virginia, Ohio, and Pennsylvania. So much for the free trade rhetoric of the administration. CCC The aftermath of the terrorist attacks has been a grim reminder that security developments can dramatically affect economic performance. But causation can move in the other direction as well. That is, long-term economic trends, both favourable and unfavourable, can themselves create foreign policy challenges and security crises. What follows is a list, in no particular order of likelihood, of eight latent foreign policy problems arising from economic developments. Because most of these longer-term concerns are more likely to materialise in a prolonged period of sub-par economic performance, they are very much related to the immediate question of how the world will change in reaction to the terrorist attacks. Deterioration of South American Economies. This is perhaps the most obvious item on my list, but no less important for all its obviousness. Argentine and Brazilian economic difficulties of the last year or two have already revealed how conditional the embrace of market-oriented economic policies has been in much of South America. The admirable resolve of those countries to overcome rampant inflation in the early 1990’s does not necessarily convert to a commitment to maintain austerity policies in the face of disappointing growth. To the contrary, if the policies preached by the United States and the IMF are not seen as promoting equitable growth, they may be abandoned. Further, there is a risk that some members of the middle and working classes may associate liberal democratic values with the market-oriented values of the “Washington consensus” and reject both. A Collapse of World Energy Prices. Possibilities that the Afghan war may spread westward or that a revolution may occur in an oil-producing nation suggest that the biggest short-term oil risk may be that of vastly higher prices. But if these unwelcome political contingencies are avoided, oil prices are as likely to collapse as rise. At first glance this may seem like cause for celebration, rather than a harbinger of problems. But there is a difference between prices that are low within the range of prices that has prevailed in recent years, and a collapse of prices below that range. Depressed prices would, of course, most likely occur against the backdrop of a recession that severely limited demand for oil and natural gas. Thus the good news for consumers would be more than offset by unemployment and falling incomes. At the same time, the revenue declines for Middle Eastern energy-producing states would seriously threaten the stability of the already vulnerable regimes of Saudi Arabia and some of the Gulf states. By spreading their oil wealth around their countries (and, to some degree, the region) those states have thus far held at bay both fundamentalists and democracy advocates. Without the wealth to do so, this fragile situation may come unglued, with potentially severe consequences for regional stability and oil supplies. Financial Collapse in Japan. Japan has drifted in and out of recession for a decade. Several times during the Asia crisis, the Japanese financial system seemed in danger of collapse, but was held together with some patchwork policy measures and a dose of luck. We have now lived with these risks for so long that there is a tendency to downplay them. Yet the banking system is still burdened with so many trillions of yen in bad and questionable loans that it is not clear the system as a whole is solvent. The high levels of Japanese government debt constrain its ability to bail out the banking system. In the event of an extended worldwide recession, a collapse could not be ruled out. The economic consequences of the period before and after a collapse could themselves be serious, as Japanese banks and companies repatriated assets held abroad in order to meet their liquidity needs. The security repercussions could be equally severe if, as seems likely, Japan turned further inward, leaving a regional vacuum once occupied by a strong American ally and the world’s second largest economy. Chaos on the Korean Peninsula. A further potential source of instability in Asia rests in North Korea. This is another situation in which the persistence of a problem that has not erupted may breed complacency. Though reliable information about North Korea is notoriously hard to come by, the economics of the country are at best very tenuous, and at worst a disaster. Should the regime disintegrate, the results could include a wave of refugees that would overwhelm South Korea, economically and socially. North Korea’s population is both poorer and more numerous relative to South Korea’s than was East Germany's population relative to West Germany's in 1990. The largely benign, though still taxing, process of German reunification is unlikely to be repeated in Korea. Meanwhile, chaos on the peninsula could tempt other Asian powers to intervene, with potentially destabilizing consequences. Rapid Ascent of China’s Economy. This is another development that looks at first glance to be largely benign. After all, the world is sorely in need of engines of economic growth, and a growing China may provide one. Moreover, the emergence of a Chinese middle class will, in the view of many analysts, create more pressures for political liberalisation. While one or both of these effects may in fact be realized, a fast-growing China poses foreign policy challenges as well as opportunities. The debate over whether a rising, self-confident China will be more aggressive or more accommodating is a well-worn one that need not be repeated here. Less discussed are the implications for the rest of Asia of China that moves rapidly up the value chain of manufacturing. With a workforce that is highly skilled for a country with its per capita income, China may soon be the locus of choice for manufacturing semiconductors, mobile phones, automobiles, and other industries. At least for a time, the lure of relatively low-wage, high-skilled labor could decimate FDI prospects in other East Asian countries. If the political and regulatory climates loosen enough, Hong Kong could eclipse Singapore as the prime regional financial center and Shanghai could displace Kuala Lumpur, Taipei, and Seoul as regional bases for multinational companies. Though principles of comparative advantage dictate that it won’t be efficient for China to produce everything, it may take some time for production patterns to sort themselves out, and a rapid Chinese economic ascent up the value chain may not give other countries time to adjust. During that transition period, the East Asian tigers accustomed to rapid growth may face challenges far more daunting than those of the 1997-98 financial crisis. Again, internal political instability raises the chances for external political and even military conflict. Needless to say, a weakened Taiwan would raise the prospect for a crisis of an entirely different order of magnitude. An Economically Decelerating China. Ironically, the opposite factual assumption also gives grounds for concern. To date, China has weathered remarkably well both the financial crisis of the late 1990’s and the global slowdown of 2001. Recall predictions just a few years ago from supposed China experts that the weight of the state-controlled firms on the banking system would limit China’s growth and perhaps lead to an implosion of the whole economy. Doubts were also raised as to whether China’s economic reforms would stall. None of these dire prospects has been realized, of course. Still, structural problems have not been solved, and China is surely not immune to a prolonged economic slump in the markets of its best customers. Were China not able to sustain improvements in its standard of living, the rather substantial regional and political tensions that have heretofore been contained by the Chinese leadership could produce internal disarray with consequences that are hard to foretell but unlikely to be pleasant, for China or for the rest of the world. Balkanizing Political Units. In the wake of the terrorist attacks there has been much speculation that international economic integration will be arrested or even reversed, as a “security premium” is effectively levied on all international transactions-longer delays in customs entry, tighter entry and immigration controls at the border, costly security measures for air and other transport services. But suppose that, as with the proliferation of energy savings innovations after the oil crises of the 1970’s, these costs decline within a few years, as governments and market actors alike learn how to achieve security at a lower cost. Assuming that globalising tendencies revive, we may witness an acceleration of the political balkanization that has been apparent in recent years. While the creation of new nations out of old has many causes-historic national identities, the demise of empires (including the Soviet Union), civil war-the creation of more and smaller political units is facilitated by economic integration. As national economies blend into regional or global markets, it is easier for a Quebec or a Scotland to envision an economically feasible independence. So too, the existence of global institutions such as the IMF and the WTO made the early life of a post-Soviet republic far more promising than might have been the case a few decades ago. The spread of such balkanizing tendencies, whatever their appeal as a realization of aspirations for self-determination, may create internal political crises in some U.S. friends and allies. Also, if these tendencies in fact result in more and more small countries, it will be increasingly difficult to achieve the positive and effective cooperation among governments necessary to address everything from international terrorism to money laundering to global cartels. Aging Industrial Democracies. Unlike each of the preceding concerns, the aging of the populations of the industrial democracies is a fact, rather than a possibility. The resulting strains upon pension and health care systems will soon be apparent in Japan, already beset by so many travails. Later, Europe and then the United States will confront less dramatic, but still serious variations on this demographic challenge. Aging societies will drain increasing portions of their national product to transfer payments and health care. While many solutions to the demographic challenge suggest themselves (for example, increased immigration, higher retirement ages), each is very controversial and thus not easy to realise. The foreign policy concern is that a secular trend towards lower economic growth will ensue, and thus threaten the underpinnings of the military and economic strength of the United States or, more likely, some of its closest allies. These eight concerns by no means exhaust the range of possible foreign policy problems arising from economic developments. One might, for example, easily add the continued exclusion of much of Africa from the global economy, which immeasurably complicates the struggles against famine, poverty, and AIDS. But the eight issues I have highlighted do suggest two general conclusions. First, while the identification of a potential problem with an economic genesis does not mean that economics alone can solve it, six of the eight potential dangers can be mitigated by solid economic growth. For example, greater political participation may be necessary for long-term political stability in the Gulf States in any case, but a healthy economy may allow the changes to be relatively peaceful. The manifold foreign policy problems lurking behind economic distress underscores still further the importance of continued and competent attention to both the short-term task of restarting world growth and the longer-term task of creating a stable and fair framework for the international economy. While the security concerns that now grip us are obviously preeminent, we must remain aware that the costs of depressed economic activity will themselves include national security threats. Second, four of my eight potential dangers are grounded in Asia. Two relate to China alone. This pattern reinforces the view that there is no more pressing foreign policy challenge than how the United States deals with China over the next decade. As then-Senator Sam Nunn insightfully observed in a speech on the eve of a congressional vote on extending most-favored-nation tariff treatment for China, history is littered with examples of established powers failing to manage successfully their relationships with rising powers. If there is any good at all that can come from the horror of September 11th, perhaps it is that cooperation between China and the United States in addressing the shared threat of terrorism will provide ballast to the overall relationship and increase mutual accommodation in other arenas. In any case, the China relationship must be attended closely behind the scenes, even as terrorism holds center stage.