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Strategies & Market Trends : Coming Financial Collapse Moderated -- Ignore unavailable to you. Want to Upgrade?

To: Box-By-The-Riviera™ who wrote (691)	5/6/2002 8:20:24 PM
From: TobagoJack	Read Replies (1) \| Respond to of 974

This here place is where I save the tabbaco for chewing later ... stratfor.com Anti-Terrorism War To Slow Economic Growth 6 May 2002 Summary The U.S. Treasury Department is issuing $33 billion in government securities this week to close a budget gap largely triggered by higher defense spending following Sept. 11. But, by tapping the financial markets, the government may be hampering the current economic recovery. One upside, however, is that this should delay the Federal Reserve's pending interest rate hike until July or August, giving debt-burdened Americans a break before they have to resume payments in full. Analysis The U.S. Treasury Department May 6 began selling $33 billion in government securities, $3 billion more than expected, to cover the expected budget deficit for the second quarter. The brief 2001 recession and the post-Sept. 11 increase in defense spending has caused the first U.S. deficit in five years. Of the $33 billion total, $24 billion is to raise fresh cash; the rest is debt rollover. The government's need to finance its war on terrorism will take investment capital out of the private market at a time when it is dearly needed to help strengthen the economy in the mid-term. The move will dampen the robust recovery that has emerged of late and will hit mortgages and long-term financing in particular. But the news is not all bad; lower interest rates will probably be extended for a few months, giving Americans a bit more time to get their debt under control. The recession and anti-terrorism campaign have both affected the government's bottom line in many ways. First, the recession has reduced government revenues; April tax receipts were down 30 percent in 2002 from a year earlier. Second, after months of bickering, Congress and U.S. President George W. Bush finally agreed on a $43 billion economic stimulus package in March, funded mostly on borrowed assets. Finally, defense and security increases combined have added $85 billion to government outlays. With partisan bickering likely to remain the norm, more deficit spending seems the preferred funding option in the short term. This isn't without consequences. The government is tapping private financial markets for $33 billion in cash that would otherwise have been used for private investments. With business investment already stagnant, this could take some wind from the sails of the recent recovery. Worker productivity -- the backbone of recent U.S. economic growth -- is so far still growing, but renewed investment now would guarantee a continued positive economic trend. Therefore, the government's need for cash could create a mid-term blip in productivity growth, and, by extension, overall economic health. The debt issuance also reduces cash available for other long-term private investments, such as the cheap mortgages that have fuelled the all-important housing sector over this past year. Still, the total deficit for 2002 will be at most $80 billion, less than 1 percent of GDP. This is miniscule compared to the massive budget deficits of the 1970s and 80s and shows no sign of being chronic. In fact the deficit is unlikely to be even as large as earlier projections indicated. The budget assumes total GDP growth in 2002 of 0.7 percent. The economy surpassed that in just the first quarter of the year. The budget is also tiny in contemporary terms. This year Germany and Japan are running deficits of approximately 3 percent and 7 percent, respectively. Despite the hit the current recovery may expect to take due to the government's debt issuance, there are still two silver linings. First, a short-term dip in growth should not be noticeable. The March stimulus package, combined with a steady stream of defense spending, should be sufficient to buoy growth in the second quarter. Second, Federal Reserve Chairman Alan Greenspan and his compatriots had their formative years in policymaking during Reagan administration deficits. The structure of the current deficit is very similar, but not nearly as large. Barring unforeseen developments, keeping growth chugging along should be easy for the Greenspan team. The most likely policy track will be to delay pending interest rate cuts until July or August, which will allow the private sector to get more traction and grant debt-laden Americans a summer of breathing room before they must begin to service their debts again in earnest.