Decoding The Happy Talk
There are plenty of Americans who have way too many dollars and far too little sense.
There has been a great deal of enthusiasm generated lately by folks like these, supporters of personally-lucrative Bush economic policies, due to the current high stock index prices. But even these folks can’t hide from the looming problems under what good economic news there is.
Take this article from The Business Ledger of Naperville, Illinois:
The U.S. economic outlook for 2007 is solid, despite the myriad challenges presented by rising energy and health care costs, expensive foreign wars and a lackluster housing market, said a panel of experts. Employment costs will go up as well.
But foreign analysis of the US economy isn’t so rosy as the Happy Talkers want us to think:
Economic growth in the US, the world’s largest energy consumer, may slow next year because of lower consumer spending and rising unemployment, said Deutsche Bank AG, Germany’s largest bank.
So which report is correct?
I lean toward non-American reports, for there is no enthusiastic political overtone nor personal economic interest to color the reporting. Nations which have large American investments would insist upon factual analysis, and not ruling-party cheerleading, in order to base their economic decisions.
One such analysis out of Brussels, goes like this:
The United States’ slowing economy will have only a limited effect on the 12 nations that use the euro, the European Union’s top economic official said yesterday. … the American slowdown is “domestically generated” while European demand has picked up and is fueling “robust growth.”
Sounds like the euro is the Geld du jour!
American economic forecasters are busy resenting a lot of pie-in-the-sky hopes for 2007, while foreign prognosticators such as Baljeet Kaur Grewal, director and chief economist at Kuwait Finance House, Malaysia, disagree:
2,000 years ago, Rome was running a trade shortfall equivalent to 3% of its total economy, which was one of the many factors that led to the empire’s eventual downfall.
Today, international bodies assert that if a country’s trade deficit exceeds 4.5% of its GDP, it’s a sign of real and present economic danger. And yet the US economy continues to defy both history and economics. At 6.4% of GDP (US$58.9bil), the US trade deficit is perilous and significantly exceeds that of ancient Rome, 20th century Brazil or any Asian country a decade ago.
And so, the recent decline of the US dollar comes as no surprise and there are good reasons to expect its slide to continue. If the dollar is certain to fall further, central banks will sell dollar reserves or switch to other reserve currencies, which will exacerbate the dollar’s fall.
There are even some American analysts, although not those who get a great deal of exposure on Fox or CNN, or in the Wall Street Journal, who can see the longer-term declination process for the US economy:
[T]he long-term economic indicators do not point to an endless road to riches for the American Empire; and no amount of cheerleading by the Bush Administration, the mainstream media, or the residue of Republicans with their heads in the sand can change the fact that the underlying substrate of economic factors points to a serious and near-permanent re-alignment of currency exchange rates wherein the U.S. dollar will be worth far less against other major currencies than it has been in many decades.
[T]he most damning of all is the chain of federal deficits the United States government has been running…
It is those budget deficits that have fueled an otherwise inexplicably robust economy for these past five years, while it is the accumulation of those deficits as national debt that has been digging the grave of the American economy as pre-eminent in the world of the 21st Century.
George W. Bush and his miserable, incompetent, war-mongering ilk are not the cause of what is happening; they are, instead, the last and greatest of the opportunistic infections pouring into a body that has for a long, long time been cutting itself open with greater and greater gashes to mask the withering of a real, equity-based growth engine of individual and national prosperity.
We had our chance. It was called the Clinton Administration, which had not only slowed down the deficits that had been the legacy of Republican Administrations going clear back to Ronald Reagan, but had finally reversed the trend and was running surpluses during Clinton’s last years in office.
We are not quite yet at the time when most Americans notice that the sky is permanently and decidedly darker than it once was: dusk comes and the twilight of Empire falls not with the swift fury of a hammer, but instead with the false whisper that each moment to come will be as bright as every moment that has already passed.
Foreign news is reporting the uncomfortable economic realities, the incovenient monetary truths that the Boom Tigers don’t want to recognize:
[P]olicy makers and central banks such as the Reserve Bank of India … seldom express a view on day-to-day currency movements. What are of greater interest to central banks are the long-term trends in currency movements and more specifically their implications for exchange rate management and the external sector.
The dollar’s prolonged weakness against key currencies may be a precursor to major changes in global financial systems. A prolonged weakness of the dollar coupled with signs of slowing down of the American economy has led to intense speculation as to whether global imbalances can at all be moderated in an ‘orderly’ fashion. The term ‘global imbalances’ may sound esoteric, but even as they defy easy solution, they have wide ranging implications for all countries.
Coordinated action by the U.S. and East Asian countries — a depreciation of the dollar matched by an appreciation of the yuan and other currencies — could be the first, though highly improbable, step to unwinding imbalances in a systematic way.
Highly improbable, indeed! Can you really see the Bush administration going before the American people to explain why their devaluation of the dollar to effect this imbalance correction cause Wal-Mart’s prices to double overnight? Me neither!
What is more likely to happen is the foreign central banks will take steps to protect their own currencies - and the dollar be damned:
Policy makers in China, South Korea and India may have no option except to aggressively contain domestic liquidity and stamp out asset-price bubbles even as the U.S. Federal Reserve Board and the European Central Bank get closer to ending their monetary tightening cycles.
Some evidence of that came last week when the benchmark Indian equity index plunged 5.8 percent following the central bank’s surprise announcement that it would remove 135 billion rupees, or $3 billion, from the banking system by raising the ratio of deposits banks are required to hold as cash.
That means taking money out of circulation to limit purchases.
There are strong expectations that the People’s Bank of China, which has already raised the reserve ratio by 2 percentage points in three steps since June, will be forced to act again to mop up the surfeit of liquidity being released by its massive trade surplus. The gap between exports and imports came in at almost $23 billion in November.
$23 billion - in just one month! It doesn’t help matters to know that this trade imbalance continues to grow:
The US current account deficit widened in the third quarter to $225,6bn, as surging oil prices pushed goods imports higher, a US commerce department report showed today [18 December 2006].
The current account, the broadest measure of US trade with the rest of the world, includes both trade in goods and investment flows. The huge US current account deficit is viewed as one of the major risks to the world economy, along with surpluses in Asian and oil-exporting countries.
Such monetary policies as those of the Bush administration - which promote continued deficit spending as prosperity - lend credence to this next prediction:
World economic growth to slow in 2007
In 2007, the world economic growth rate will drop, especially in the United States and Europe, said Prof. Pedro Videla in a recent Continuous Education session with alumni in Barcelona. Videla warned of several risks to the world economy, such as greater protectionism and dramatic increases in housing costs. Another risk, he said, is that the U.S. economy depends significantly on just a few other countries.
What is this risk? Just look:
A growing deficit would pose a risk to the economy should investors sour on US assets and diversify to other countries by precipitating a sharp weakening of the dollar and pushing interest rates higher.
That would cause US consumers to drop out of the market for major purchases like cars and homes. Housing sales are already low, with slackened demand causing a six-year low in housing construction starts last month.
There is some agreement with this assessment that the poor housing improvement indicates trouble is brewing:
The housing market remains one of the key points of focus for economy watchers, both for its declining trend and secondary impact on other sectors. It is important to emphasize that the data slated for release over the remainder of the year is seen having a more negative impact on the dollar rather than positive, due to its emphasis on housing and manufacturing reports, which have been the soft sectors of the economy.
There is even concern that the home improvement industry could be adversely affected.
And the result on the economy of this pending negativity?
We continue to anticipate further losses in the dollar, largely as a result of interest rate differentials and continued central bank diversification of FX reserves.
The Philadelphia Fed Survey, due out on Thursday [21 December 2006] is forecasted to deteriorate further to 4.0 in December compared with 5.1 a month earlier. Recall last month the dollar declined following a disappointing result in which markets were expecting a 5.5 reading.
The U.S. currency may fall to $1.3150 per euro, on speculation a report today [18 December 2006] will show the U.S. current-account deficit widened to a record because of demand for goods from China. Investors are expecting the deficit to rise to $225.0 billion from $218.4 billion in the previous quarter.
US investment markets aren’t the only ones facing a serious downturn:
Japan’s Small-Cap Drop May Foretell Trouble for Global Stocks
By Michael R. Sesit, Bloomberg
Dec. 18, 2006
Japan may be a harbinger of what lies ahead for stock markets worldwide. Investors there are turning away from shares of smaller companies in favor of larger ones such as Suzuki Motor Corp. and Canon Inc. as a slowing economy weighs on the overall market.
Investors typically turn to large-cap stocks as growth slows. The economic expansion in Japan cooled to a 0.8 percent annual rate in the quarter ended Sept. 30, less than half what the government had estimated, from 2.7 percent in the first three months of the year. The rate will slip to 2 percent next year from 2.8 percent in 2006, according the Organization for Economic Cooperation and Development.
Strategists at Goldman are recommending shares of larger companies for 2007, citing the prospect of a further slowdown in the U.S. economy. Goldman forecasts U.S. growth will slow to 2.1 percent next year from 3.3 percent in 2006.
And in Thailand:
Plunging Thai stocks worry Asia
The drastic fall in share prices on Thailand’s main bourse index came after the authorities, worried the strength of the baht currency would hurt exporters, said on Monday they were slapping controls on short-term speculative inflows. In response, the baht fell around 2 percent from a 9-year high on Monday and regional stocks were also hit, with MSCI’s index of Asian emerging markets down around 1.6 percent at 0545 GMT as foreign money pulled back.
“There is a lot of money already in the Thai markets. If they are pulling out, we are dead,” a dealer at a domestic brokerage said.
The official view in Thailand and in much of the world’s financial markets is that US slowdown is to drag down global growth. This can’t be good news for foreign investors, who lend the US $2 billion a day to finance just the trade deficit:
[T]he worry is that at some point the desire for dollar-denominated assets could weaken, triggering sharp declines in the value of the dollar and pushing interest rates higher.
But what worked in the past to keep the economic-reckoning wolf away from the door is the strategy to keep it away in the future:
Why borrow simply for the sake of borrowing? It seems like a very American thing to do, to spend money you don’t have for the sole reason that some moron is willing to lend to you. [C]reating an additional $2.7 trillion stock market value is not that hard after all. It simply requires an enormous amount of debt. And unfortunately, you’re about to see corporate Australia, along with the rest of the world, follow the lead of private equity and load up on debt.
“Advisers said many companies planned to take on more debt to lower their cost of capital, because it was cheaper to borrow than to sell shares and pay dividends,” says Joanne Gray in [18 December 2006]’s Australian Financial Review.
The inside info is that this strategy is expected to work:
“While the world’s other major economies will be affected by slower U.S. growth, their own domestic demand should continue to drive global growth,” Swiss investment bank UBS said in its year-end outlook for the global economy.
UBS? Aren’t they accused of defrauding investors? I’m not sure I’d take their word that the sun will rise tomorrow, much less international investment markets. Such distrust puts them in the realm of those who definitely see economic disaster arriving tomorrow - or maybe, believe that it could but are willing to wait and see whether the dollar’s collapse will promote the acceptance of the Amero as the common North American currency.
Such cacophony makes it hard to hear the Common Man, who after too many years, finally sees the Big Picture:
The Republicans proved that it is they, not the Democrats, who should wear the jackass as their symbol. …they have proved to be the most financially irresponsible Congress since the founding of the Republic. They passed another continuing resolution to keep the government stumbling along until Feb. 15 — and left town. This is the Republican version of “cut and run.” We can be thankful that a considerable number will not return.
D. FERREL ATKINS Charleston
There will be a lot more developments coming in the near-future to illuminate the economic darkness. The Happy Talkers will be very busy trying to influence us to see things only their way - and to pay them for the privilege.
But anyone who has ever balanced a checkbook knows that tomorrow always comes sooner or later, and there had better be sufficient balance available to meet one’s obligations. Those who have had control of the national checkbook seem to have forgotten that concept, as Mr. Atkins of Charleston reminds us.
If there is any chance that the collapse of the American economy can be avoided, major reductions in expenditures for frivolous goals (like control of the world energy resource supply through military action) will have to be eliminated in favor of paying off that which has already been squandered while revenue will have to be enhanced. As you can see at the head of this post, there are some whose irresponsibility can be redirected through the usage of a progressive tax policy and put to good use to correct the economic distress they helped to create.
Is that not justice?