Posted on 01/15/2005 1:01:08 PM PST by Trueredstater
WASHINGTON (CBS.MW) - The fact the United States is the world's largest debtor nation is a dark cloud looming over President Bush's second term.
While some economists suggest the cloud could produce a violent storm, others are less concerned. Regardless, the huge U.S. indebtedness and how the White House deals with it will be a pivotal issue over the next four years.
"Global imbalances are the major economic problem facing the world today," says Kenneth Rogoff, a Harvard professor and former International Monetary Fund chief economist.
The deficit in the current account has been growing larger for two decades. The deficit hit $164.7 billion in the third quarter of 2004, up 50 percent from $109.8 billion in the last quarter of 2000 when Bush took first office in January 2001.
What troubles economists is the fact that the deficit is approaching 6 percent of GDP, a record size relative to the overall economy. Already, the U.S. has to import $1.8 billion in foreign savings every day to pay for our appetite for imported goods.
Europe and Japan are on the other side of the equation, selling more to U.S. consumers than their citizens are buying from America. China also is sending massive exports to the U.S. while keeping its currency low to also keep the favorable terms of the trade flowing.
How long can this situation continue? Economists don't pretend to know. But economic logic suggests it can't last throughout the next four years of the Bush presidency. History suggests the debtor country will bear the brunt of any adjustment, says Robert Brusca, chief economist at FAO Economics.
Bush policy key
The outline of a solution to U.S. dependence on foreign capital isn't in serious dispute: Higher savings in the United States, a reduction in the growing federal budget deficit and less spending by U.S. consumers, meaning lower GDP growth since consumer spending comprises two-thirds of GDP.
Another important factor has been faster growth in Europe and Asia. Some say the value of the dollar must decline further against foreign currencies to improve U.S. competitiveness. And here is where things get sticky.
The dollar already has dropped 50 percent against the euro and 24 percent against the yen since a peak in February 2002. Europe and Japan are balking at the prospect of any more weakening.
The Chinese currency has remained pegged at 8.3 yuan per dollar since 1995 and the political leadership of China has been wary of altering this anchor. The Chinese political elite are worried that a stronger currency would increase the unemployment rate in China, creating political unrest.
Analysts say the Bush administration may have to lead a coordinated global response to unwind the deficit in a smooth and orderly fashion.
"You would need to see President Bush getting domestic consensus for some increase in national savings and have the U.S. resume its leadership in terms of global policy coordination," el-Erian says.
If the White House doesn't take these steps, "the adjustment burden will be undertaken by the market," el-Erian says. "The risk here is you get a collapse of the dollar and a spike in market interest rates."
Unfortunately for Bush-haters, the U.S. experienced its highest levels of economic growth during periods of its highest debt levels. Funny thing, people don't lend money to a loser---unless you're the UN. Repeatedly we've seen countries pouring money into the U.S. because we are the best investment around. Who you going to lend money to? Do you really trust China? Iran? How about S. Africa?
You have touched on something that just doesn't get much notice by the money pundits. When US companies move off shore,
I'll bet much of the profits do come back to the U.S.
soooo, amenisty for illegals wont be an achilles heal too?
" Already, the U.S. has to import $1.8 billion in foreign savings every day to pay for our appetite for imported goods. "
There are two components of any budget - income and outgo.
The Dems could care less about spending. For all of Bush's propensity to spend our tax dollars, he could never spend enough to satisfy them.
Their sole objection is that we don't tax enough. And we should never lose sight of that fact when Dems try to lecture us about fiscal responsibility.
Consider the source.
Washington appears to have a spend mindset. They are giving money away like it was theirs to give to whomever and for whatever cause they choose.
For example, this latest idea of raising the death benefit for the military to $100K retroactive, how did they arrive at that particular figure? Why not $250K?
They are opening pandora's box with that idea, there was a wife on TV who said, "they better pass it otherwise they will have to speak to us",(a threat already?) a group (yes they already formed a group) said, "why should the $100K benefit only apply to those killed in the theatre why not those that die from whatever causes on their base while on duty".
But point being the entire administration and the House have a spend mentality which is not the Conservative way many of us are accustomed to expecting from fiscally conservative Republicans.
If there are other ways of looking at the spending going on in Washington these days than please lets hear it.
Here's a chart from last April that shows the basic picture. Ignore the top chart, which is not immediately relevant. The bottom chart shows the current account. As you can see, there were earlier problems which were corrected, but that the deficit really fell out of bed just about the time clinton came into office, and has been getting worse ever since.
Naturally, the media are all blaming Bush.
They can blame Bush all they want now, last I heard he won't be running for election in 2008. besides this economic fear mongering is about in the same class as the global warming arguement. No one really knows when the economy will turn bearish again, but leading economists think we are in for a long term bear market. We are in an upswing now. But I would not bet everything that we should put it all in gold just yet.
Absolutely correct - the administration and congress do
have a ruinous "spend mentality." Heritage recently pointed
out that government spending is now a dangerous 39.5% of
GDP. What is very disappointing to me and other fiscal
conservatives is that Bush is a reckless spender. The
prescription drug program will end up costing us trillions
when it fully kicks in. Ted Kennedy wrote the No Child Left
Behind education bill which is the biggest boondoggle since
Carter established the Dept. in 1976. Bush signed the big
agriculture bill which is 40% pork. In fact, Bush hasn't
seen a spending bill he doesn't like - we conservatives
should remind him that there IS something he can do but
has NEVER done: VETO congressional bills that waste our
tax dollars!
It is very refreshing to hear someone mention the reckless spending our "fiscal conservative" President has engaged in. It makes me sick.
This man has not met a spending package he doesn't like -- regardless of the cost.
This particular website is very well-regarded by myself and fellow traders. It, Bloomberg, Briefing and the Dow Jones News of Morningstar are staples for most traders.
There aren't.
For once, I would love to hear someone stand-up and say "no" t the spend mentality that pervades politics of both parties. But, it is something we won't hear because it goes so against the grain.
Neat chart. Both bottom and top.
The two together show how the plunging dollar preceded a reduction in the current account. There are those who might even suggest a bit of causality in that correlation.
Now, I'm sure that's changed some. But how much? How advanced, technically is China now? They are buying tanks and missiles from Russia that are 25 years old. Yeah, they got "advanced" stuff from Hughes in the 1990s (not since) meaning that at best their stuff is 10 years behind ours. Proprietary stuff, like computers and so forth, is likely 30 years behind ours.
But say it is within five years: the nature of closed or quasi-closed societies is that ideas do NOT percolate. Very quickly, "cutting edge" technology becomes obsolete. I am extremely skeptical about "threats" from societies like China, or even Japan. We saw how quickly the Japanese "threat" unraveled.
Plus Bush's Achilles heel will not be a vibrant economy, it will be immigration..
"CBS.Marketwatch.com"
seebs.marketwatch.crap
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