The U.S. and local economies have passed into a period that flies in the face of conventional economic wisdom: sustained growth, some reported labor shortages, yet very little inflation.

This “Goldilocks” economy has been wonderful for Wall Street, which managed to post a gain of about 25 percent in 1997, even while there was much hand-wringing about Asia, possibly weaker corporate profits, and a panoply of other perceived threats, including weak consumer demand.

But how long can the good news go on? Can we look forward to yet another year of low inflation and economic growth?

Our own round-robin of market players said “yes” another good 12 months is in store.

Robert Flaherty, co-founder of Flaherty & Crumrine in Pasadena, a bond fund manager, says he never guesses at interest rates, and hedges his portfolios against interest rate ups and downs.

“When you’ve been in the business 38 years, you learn to not make these projections,” he said.

But when asked, he allowed, “If you stuck a gun in my ribs and made me invest, I would guess rates are headed down by the end of the year.”

Like many others, Flaherty noted that currency devaluations will make Asian goods cheaper in the United States, while simultaneously decreasing demand for U.S. product. That will tend to depress economic growth, and thus interest rates.

The wild card is the unfolding financial debacle in South Korea, Japan, and other Asian nations.

If the governments of those economies, and international monetary authorities, manage to botch things badly enough, the banking system could be strained, leading to a potential liquidity crisis as banks take losses on bad debts and pull in their lending horns, said Flaherty.

Like many economic and market observers, Flaherty was intrigued by reports of an increase in productivity.

“I know in the money-management business (due to personal computers), we do twice as much with half as many people as when I started, but I don’t know that that can be measured,” said Flaherty. The long-term effect of more-productive workers is a decrease in inflation, Flaherty said.

Looking for a decrease in interest rates and inflation in 1998 is Michael Bazdarich, of La Canada Flintridge-based MB Economics Inc. and consultant to UC Riverside regional economic forecasts.

“There has been a lot of hype about this economy, but really it is the slowest expansion in U.S. history,” said Bazdarich, who noted the economy grew at 4 percent and 5 percent annual rates in the 1960s, and 3 percent in the good years of the 1980s, but only at 2 percent rates in the 1990s.

A dyed-in-the-wool monetarist, Bazdarich notes that money-supply growth has been very restrained under Federal Reserve Chief Alan Greenspan. “With a slow-growing economy, and tight monetary policy, no way are you going to have inflation,” he said.

Facing a slow-growth economy and virtually no inflation, Greenspan will actually ease up and lower interest rates in 1998, predicted Bazdarich.

“Long-term rates will go down even further,” said Bazdarich.

Licking his chops in anticipation of 1998 is Ed Bagdasarian, managing director and partner at Barrington Associates, a Westside investment banking shop.

A slowing economy, lower interest rates and a flat market on Wall Street will be good for the mergers and acquisitions market, which is Barrington’s forte, said Bagdasarian.

“The current environment (low interest rates, but some economic growth) is going to perpetuate in the boom in mergers and acquisitions we have seen in the last few years,” he said.

The relatively stable environment is good, said Bagdasarian. “When things are stable, that’s typically good for overall M & A; activity. When there is a lot of uncertainty, that’s when people don’t want to do a deal.”

The slowly growing economy but so-so stock market will help the M & A; market, concurred John Mavredakis, investment banker at Houlihan Lokey Howard & Zukin, a Century City-based financial shop.

“The initial public offering (of stock) market will not be as good in 1998,” Mavredakis said. “That will mean many companies that might have gone public will instead seek to do a merger or other private equity transaction.”

Some are actually wondering if the U.S. might experience deflation in 1998.

“There is an abundance of cheap labor around the world which can be substituted for American labor,” said Bill Mason, Pepperdine lecturer and money manager with Cullen Fortier Asset Management Inc. in Woodland Hills. In the absence of a significant increase in the money supply something Greenspan is not likely to oversee the pressure on prices will be down, not up, said Mason. He is looking for long-term Treasury bonds to fall below 5 percent annual yields by the end of 1998.

Looking at least for a bump-up in rates in 1998 is Jeff Rollert, founder of ALM Advisers Inc. in Pasadena, a bond management shop.

The Far East financial problems will lead to something of a liquidity crisis for banks, which will ration their remaining funds by raising rates, Rollert believes.

Long-term rates will blip up on 30-year Treasury bonds, from about 5.85 percent in late 1997 to perhaps 6.25 percent by mid-1998, said Rollert.

But the sluggish economy and cheaper imports will keep both inflation and interest rates generally in check, said Rollert.

So there you have it none of these local experts is expecting inflation or interest rates to rise much, seven years into a domestic economic expansion.

Contributing Reporter Benjamin Mark Cole writes about the investment community for the Los Angeles Business Journal.