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Politics : PRESIDENT GEORGE W. BUSH -- Ignore unavailable to you. Want to Upgrade?

To: Kenneth E. Phillipps who wrote (385609)	4/4/2003 2:06:29 PM
From: DuckTapeSunroof	Read Replies (1) \| Respond to of 769667

In response to your deficit article: Message 18797549 It appears to be an entirely reasonable examination of the problem. Some comments: "Nevertheless, as budget deficits surge and keep surging, there comes a point at which they start to matter. That point is probably well above $500 billion." >>> Yes, it is not a linear relationship, because it is based on psychology... investor's perceptions of the markets and the future trends. The 'wall of worry' analogy seems apt. >>> Currently, our trade deficits ($500 B., all-time high) are financed by an inflow of foreign capital. >>> If foreign investors (presently pouring some $1.5 B. per day, I believe) into our capital markets stop the inflow, then instantly we have trouble. >>> As I've pointed out before, much of the 'prop' under the dollar is the absence of suitable alternative destinations for the investment capital. Although foreign investors in our capital markets have suffered the equity market declines along with American investors, because the dollar has fallen some 20% against the Euro over the last 18 months or so... their investment losses (in US stocks OR bonds) has been magnified by that currency decline. >>> This has begun to cause a noticeable reduction in foreign capital inflows. The reason this hasn't become a torrent moving against us - and making our interest rates soar - is because of the dearth of suitable alternative investment destinations in the rest of the World's capital markets. >>> Over that same 18 months, the European and Japanese equity markets have fallen even further than our stock markets (roughly balancing the extra losses they have incurred because of the dollar's steady decline). -- Of course, those who have invested in EU government bonds haven't suffered the same losses... because their currency has strengthened. >>> It seems to be the fact that economically Europe and Japan (Japan being a total basket case) are performing even worse than the US that is the only prop under an even larger US currency decline. >>> It's not that we are doing well (we're not), it's just that the only economies large enough to serve as potential alternative investment sites are doing even WORSE. >>> Still, because of the HUGE US trade imbalance (negative $500 B.), and the fact that Europe and Japan post POSITIVE trade balances, our dollar will continue to decline vs. their currencies... and ultimately this could hit that 'wall' you UPI article mentioned, and cause a drying-up of foreign... rapidly forcing up our interest rates (which would slow growth even further here, and could easily bring about another recession, or even depression). >>> So, it is NOT just the government budget deficits, and it is not just the steady ticking higher of the US national debt (some $120,000 for every man, woman, and child in the country)... it is the HUGE trade imbalance. >>> The largest part of this trade imbalance is with China. As long as they keep their currency pegged to the dollar, they will keep on exporting dis-inflation and deflation to the World. >>> With every tick lower of the dollar's value against the yen or the Euro, China's exports become even more competitive against their trading partners... because their products are effectively priced in dollars, and they already have the lowest-cost manufacturing base in the World. >>> Now, back to the federal budget deficit. >>> As your article points out: federal budget deficits of some 5% of GNP may be 'readily finance-able' for a while. >>> I would hasten to note that 'emerging markets' run budget and trade deficits most of the time. Because they are perceived as 'undeveloped', capital flows in seeking higher investment returns. American ran trade deficits and posted positive inflows of foreign capital (mostly British) for all of the 19th. Century. >>> :) (And, similarly, to many of the 'emerging markets' of this century... foreign investors were periodically wiped out by investment busts and frauds.) >>> I tend to agree with the conclusion in you article: somewhere between a 5% and a 10% deficit likely lies that Wall of Worry, the 'crowding-out effect', and higher interest rates and BIG TROUBLE. >>> The article posits that the tipping point might be at a deficit of some 8% of GNP ($837 B.)... and that sounds reasonable to me. >>> It further estimates that by "September 2004, even though U.S. public debt will still be quite low, the federal budget deficit will have topped 6 percent of GDP, and be getting fairly close to the invisible 'wall.'" ... which pushes the onslaught of the most serious negative reactions off into '05. >>> I would only add one other thing: the breaking of the Chinese dollar peg MUST happen... else they will soon beggar all of their neighbors, and suck up all of the World's manufacturing growth... and continue to export deflation to the entire World. >>> Furthermore, they have committed to breaking the peg sometime in the near future, because of their WTO accession negotiations. The tentative date for that is also '05. >>> A free-floating Chinese currency will surely rise against the dollar, and this one event could also serve to advance that 'tipping point', as it will provide a suitable alternate site for investments to flow to (one of the things - the absence of which - has kept the dollar from falling farther recently). >>> The US interest rates could begin to rise very rapidly once those two things happen: budget deficit climbs above 6% of GNP, and China starts breaking the dollar peg.