Hiccup? Or Global Meltdown?

By MID-DECEMBER, THERE WERE STILL PLENTY OF PEOPLE WHO believed in a Kevlar America. The Asian implosion, they said, mainly meant lower import prices for American Christmas shoppers and, therefore, lower inflation and lower interest rates. Their confidence translated into higher stock prices. Sure, on Oct. 27, the Dow Jones industrial average plunged 554 points on fears that the so-called Asian contagion might actually affect the bulletproof American economy. And there have been other bumps since then; the Dow closed at 7756 on Dec. 19, down 200 points in two days, partly on worries about Japan. But for most of this year, even as the news in Asia got dramatically worse, the American equity market managed to hold its own.

The confidence, it's true, was not irrational. The American economy is extraordinarily healthy. Decades from now, this will rightly be viewed as a golden age. What in 1996 author James Grant called ""Wall Street's vision of heaven on earth'' has, if anything, only gotten better in 1997. U.S. unemployment is at a 25-year low; inflation is practically nonexistent, productivity is surging and growth remains strong.

And for all that--make no mistake--the rest of the world can only say a quiet prayer of thanks. Not since the end of World War II has the world's economic well-being been so linked to the health of the United States. America absorbs 15 percent of the world's exports, and that number is about to go up--perhaps rapidly. Virtually every country in East Asia has seen its currency plunge against the dollar during the past six months. That means made-in-Asia products are going to be much cheaper in the U.S. market relative to American goods. The top executive at one of Tokyo's largest companies may well have been speaking for the entire region when, asked what he wanted for Christmas, he replied: ""A strong U.S. economy.''

After 1997's stunning East Asian economic collapse, there is indeed no other game in town. Europe, after years of stagnation, now at least has an economic pulse rate, but it isn't growing swiftly enough to drag Asia out of its looming depression. South America also has been wounded by East Asia's serial blowouts. It is not much of an exaggeration now to say that there are two things that stand between the world and a vicious, deflationary bust: the International Monetary Fund, acting as the lender of last resort, and the United States of America, acting as the buyer of last resort.

With those two pillars in place, it is reasonable to assume that the world may manage to avoid the worst-case scenario: a Japan-led financial crisis that crushes the U.S. markets and, eventually, its economy. But that possibility was--and to some extent still is--very real. This summer, the ignorance-is-bliss crowd in the United States made two fundamental mistakes: it did not realize how bad things were in East Asia (including Korea) and how integrated into other East Asian economies Japan had become (Thailand is practically a wholly owned subsidiary of Japan Inc.). So Wall Street analysts kept talking about the crisis in ""Southeast Asia,'' and how little countries like Malaysia were, when viewed from the perspective of the mighty United States, really just flyspecks on the world's economic map. In fact, the Southeast Asian collapse only put more pressure on a deeply troubled financial system--Japan's--which in turn had a dramatically negative effect on business confidence in Tokyo.

That's why, for the first time since the summer, Tokyo recently provided some hope that it may, ultimately, come to grips with what's at stake. On Dec. 17 Prime Minister Ryutaro Hashimoto announced a much larger than expected tax cut, after it had been made abundantly clear that Japan's economy was lapsing into a free fall. ""We will never let the world fall into recession because of Japan's actions,'' Hashimoto vowed. At the same time, the government seemed to concede that, as in America's savings and loan debacle, lots of public money would have to be devoted to the financial sector in order to soothe global fears that Japan could yet follow South Korea into oblivion. (Fortuitously, Seoul on the same day announced that it would give up all controls on its currency, a move that led foreign investors to believe the worst there may finally be over.)