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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA -- Ignore unavailable to you. Want to Upgrade?

To: Steve Lee who wrote (14158)	8/10/2002 4:08:15 PM
From: High-Tech East	Respond to of 19219

... hey Steve ... even the bloody-English have it properly ... <g> ... editorial in the Financial Times today ... *A world haunted by past excess* Published: August 10 2002 5:00 \| Last Updated: August 10 2002 5:00 At first the US economy was supposed to be pausing for breath before it embarked on a V-shaped recovery. Then, the appropriate descriptive letter was deemed to be a lower case u, to denote one of the shortest and shallowest recessions on record. Now an L looks more appropriate, or even a double-dipping W. In any case, the words of John Maynard Keynes have gained fresh relevance. "When the facts change," he is said to have told a critic, "I change my mind. What do you do, sir?" In the past month, data revisions have rewritten the history of the US economy. It grew at an annual rate of about 3 per cent in the first half of this year, not the 4 per cent expected. Worse, growth in 2000 was less strong than thought and last year's recession was not so short, or so shallow. Yesterday, those revisions to US output took their toll on productivity figures. Rather than 2001 productivity growth of 1.9 per cent, it barely exceeded 1 per cent. And in 2000, productivity did not grow at the remarkable 3.3 per cent rate previously thought but at the altogether more modest rate of 2.9 per cent. All told, the 3? per cent growth in 2002 forecast as recently as mid-July by Alan Greenspan, Federal Reserve chairman, does not look achievable. On Monday, the International Monetary Fund said it would downgrade its assessment of the US economy when it revised its views in September. So far the Fed has declined to comment but everyone expects it to offer a more sober view of the economy on Tuesday, when it meets to set interest rates. Depressed growth Revised opinions are not limited to the US. In the UK, the Bank of England said the stock market decline would depress growth for the next two years. And even the European Central Bank, ever keen to stick to its guns, now worries little about inflation. On Thursday it said the "risks to price stability have become more balanced". Unfortunately, it should come as no surprise that so many policymakers have been forced to change their minds. For there is one constant economic fact that underpins the current uncertainties: developed economies are adjusting to past excess. In the US and Europe, a corporate investment boom, mostly in high technology industries, accompanied the late 1990s euphoria - but it is now clear that much of that money was simply wasted. Investment excesses were matched by a consumer spending surge in the UK and the US, leaving household finances extremely vulnerable to unforeseen events. The dollar's value still defies logic and gravity. And in Japan, the effects of the 1980s cycle still haunt the economy. With hindsight, it is easy to blame monetary policy mistakes for the excess. Central bankers were fixated on their success in controlling inflation and allowed the other signs of serious economic imbalances to pass them by. They did not realise that it was precisely their towering reputations that could allow misalignments between supply and demand to grow without showing up in the inflation figures. Prices became a less reliable indicator. Weak demand But those mistakes are in the past. They cannot be rectified. The task now is to manage a post-excess economy. Realism is imperative. Prospects for demand, particularly in the US, are weak. Inflation is not a threat. Indeed a modest rise in global prices could help smooth necessary transitions. US consumers remain severely stretched and are more likely to retrench than to increase their borrowing in the short term. After the downward revisions to past US economic performance, the dream of future riches to pay current debts is dimming. Investment, too, is unlikely to provide a big boost, given the spare capacity in the economy and new-found conservatism among managers. Further fiscal expansion remains a possibility but its scope is limited, owing to the spending increases and tax cuts already implemented or proposed. So the best hope for a demand boost in the US is an increase in net exports driven by a lower dollar. The same conclusions are apt for the UK economy, although here the excesses were a little less extreme. The problem, in both the US and the UK, is that attempts to smooth the adjustment process with lower interest rates carry the risk of deferring and amplifying the eventual reckoning that must occur. In the eurozone, the picture is somewhat clearer. Its economy is suffering, inflation is falling fast and consumers are not nearly as stretched. So the ECB has the scope, if not yet the will, to lower interest rates. It must do so if the dollar continues to fall. The economic backdrop has darkened. That does not make another global recession inevitable. But the facts have changed and economic policy must be prepared to react.