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One on One Interview

SUSIE GHARIB: The US stock market was pressured today by increasing tensions in the Middle East, with Israel firing missiles near the headquarters of Palestinian leader Yasser Arafat, plus Argentina's continuing economic problems. Joining us live from midtown Manhattan to talk more about this is Lakshman Achuthan. He's international economist with the Economic Cycle Research Institute. Nice to see you, Lakshman.


GHARIB: Hi. Let's start first with just you giving us an overview of how vulnerable do you think that the U.S. economy and the U.S. stock market is to these international events?

ACHUTHAN: Well, we're in a recession here in the U.S. and recessionary periods in particular are times when events, if there's some unknown shock that occurs, it has a much larger impact than if you're in a non-recessionary time. Furthermore, we're in a synchronous global recession and that hasn't happened in a long time. So even compared to, say, '90-'91, I think the event risk that is out there is significant.

GHARIB: Well, let's talk about the Middle East specifically. How concerned do you think investors should be about the increasing tensions between Israelis and Palestinians?

ACHUTHAN: Oh, I think concerned. You know, that's been an area that it was important to keep kind of under control as we have this coalition to prosecute the campaign in Afghanistan. And so you can have political event risk and at a time when the economy is in recession and trying to get a recovery going, those kinds of negative impacts-for example, of oil prices rise, that could really hurt the economy right now.

GHARIB: So what do you see as the biggest risk to the U.S. from what's going on in the Middle East?

ACHUTHAN: Well, I think...

GHARIB: Is it oil?

ACHUTHAN: Yes, oil is certainly one. We've seen for the last few weeks oil prices falling and that increases discretionary spending to consumers immediately. And the consumers have been the only thing holding this economy up from a deeper recession.

GHARIB: Let's talk...

ACHUTHAN: And so it's very critical.

GHARIB: OK. Let's talk a little bit about Argentina and the continuing financial woes there. What's the risk to the U.S. from what's going on in Argentina?

ACHUTHAN: Remember, they're part of the global economy. We're in a recession so they're not exporting. They're under a lot of pressure right now. And we had the Thai currency issue in '97 start the Asian crisis and then in '98 we have the Russian defaults trigger LTCM.


ACHUTHAN: So we don't know how it happens, but it could happen.

GHARIB: Just to wrap it up here, we saw the dollar, though, trade up against other foreign currencies. Do you see that as a positive or a negative for the U.S.?

ACHUTHAN: Well, I mean it's a positive because it can help keep our interest rates down. It's a negative because it makes it more difficult for us to export abroad to these weaker markets. So it's a kind of double-edged sword.

GHARIB: OK, thank you very much, Lakshman. We appreciate your talking to us.

ACHUTHAN: Thank you, Susie.