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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: westpacific who wrote (1774)	1/16/2001 7:08:53 PM
From: westpacific	Read Replies (1) \| Respond to of 74559

Part 2 cont. It is true that the US economy today is much stronger that it was 20 years ago. And it is running a substantial fiscal surplus, wereas the budget had already moved into deficit when Mr. Reagan acted in 1981. Moreover, the Bush program is designed to be phased in over several years. But any decline in a budget surplus reduces public and hence national saving just as much as an equivalant increase in a budget deficit. Adequate investment and growth can then be maintained only if offsets can be found from increases in domestic private saving or more foreign financing. There may well be some of the former, especially by individial households. But the US would still have to attract sharply higher investment from abroad to finance the proposed tax cuts when there is already a considerable risk that such capital inflow will fall from its current level. As for timing, Congress will almost certainly accelerate impllementation of the Bush proposals. Democrats as well as Republicans, especially in the H of Rs with its shorter political time horizon, may even engage in a "bidding war" to expand and take credit for the measures, as they did in 1981. It is true, too, that the Reagan tax reductions were - for a while - financed by increased inflows of foreign capital, promoting brisk recovery of investment and growth for the recession of the early 1980s as the US drew down the foreign asset position that it had built over the previous 60 years. But inevitably, the, the dollar fell sharply - by about 50% in 1985 to 1987 - pushing up interest rates and eventually triggering Black Monday. A large tax cut in 2001 might similarly receive a temporary respite. But any resultant strengthening of the dollar as in the early 1980s would, in addition to further depressing the manufacuturing and farm sectors, widen the trade deficit and ensure that the dollar's eventual fall would be even sharper. The respite could not last long in any event, owing to the precarious international financial position that the new adminstration will inherit. Given that the Fed has clearly signalled its intention to provide whatever stimulus the economy turns out to need, the far wiser policy course is to rely on further reductiosn in market and Fed interest rates. Real US interest rates remain very high by historical standards and could fall substantially without creating inflationarry risks. New tax cuts would increase government borrowing and therefore put pressure on interest rates as well as jeopardise continued foreign funding of the external deficit. Director of the Institute for Internationl Economics - Fred Bersten