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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: tradermike_1999 who started this subject	10/22/2000 5:08:36 PM
From: tradermike_1999	of 74559

The current account deficit is the crutch of the matter and the hotspot in the national economy. Don't have time to touch on it in detail now, but this interesting article points out that it has not been this high since 1894. Dollar in danger David Hale, FT, September 5 2000 The writer is chief global economist at Zurich Financial Services Group The US dollar has been so resilient for so long that most commentators cannot conceive of circumstances in which it would experience a sharp correction. Foreign demand for US assets remains so strong that there is little reason for investors to lose faith in the short term. But once the US presidential election is over confidence could be tested by a variety of policy surprises. The second great risk posed by the presidential election is that it could set the stage for a clash between monetary and fiscal policy next year. The US currently enjoys such a large federal budget surplus that it will be impossible to prevent fiscal policy becoming more expansionary. The total surplus is projected to be $4,500bn over the next 10 years, or $2,500bn excluding Social Security. In addition to the risk of inflationary overheating, Mr Greenspan is also concerned at the size of the US current account deficit and the danger that fiscal stimulus could increase it further. During the late 1990s, the US private savings rate fell sharply as the government built up large surpluses. If the government now reduces its surplus without any offsetting change in private savings, the current account deficit would easily expand to 6-7 per cent of GDP. In the 1980s, fiscal stimulus initially helped to bolster the value of the dollar by increasing real interest rates. But it is unclear if tax cuts and higher spending would be as positive in 2001-2002 because of the changes which have occurred in the US’s external financial position since the early Reagan years. The US will soon have a deficit on its international investment account of 20 per cent of GDP, compared with a previous peak of 24 per cent in 1894. The expansion of the current account deficit to 6-7 per cent of GDP when there is already a deficit on investment income could at some point frighten the foreign exchange market and set the stage for a dollar correction.

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