(for the year-end issue of the Neue Zuercher Zeitung )
In the industrial core of the world economy 1998 saw the trends of 1997 continue. The Japanese economy continued to stagnate. The Japanese government continued to fail to take the obvious steps to end what is now a near-decade of economic stagnation. As Europe approached the eve of its Monetary Union, some continued to fear that EMU would see a great amplification of the size of recessions (as governments gave up their power to use monetary policy tools to stabilize production and employment) while others continued to eagerly look forward to the productivity boom they expected once exchange-rate risk stopped hobbling intra-European trade.The United States continued to see the most favorable inflation-unemployment tradeoff since World War II. But American stock market values continued to be very high multiples of corporate profits. Financial analysts forecast an average of 18 percent growth in corporate profits in 1999. It is hard to see how this can be anything other than "irrational exuberance." When earnings forecasts come back into correspondence with reality the shoe may drop and U.S. stock market values crash.