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To: Lucretius who wrote (269221)	12/1/2003 8:07:14 PM
From: orkrious	Read Replies (2) \| Respond to of 436258

Incredible drivel put out by Stratfor Global Market Brief: Dec. 1, 2003 December 01, 2003 0115 GMT Summary The euro reached a new high against the U.S. dollar Nov. 28, trading above $1.20 for the first time since its launch in 1999. A Bloomberg News survey reported Dec. 1 that the dollar likely will continue its decline against the euro for the fourth consecutive week. The dollar's decline, plus twin budget and current account deficits, have convinced some traders and analysts that the U.S. Federal Reserve will raise interest rates in early 2004. However, this perception might be inaccurate. Analysis As the dollar continues to weaken, many foreign investors and currency traders are becoming convinced that the U.S. Federal Reserve will increase the interest rate target -- from its current 45-year low of 1 percent -- as early as first quarter 2004. This prediction is based on two core assumptions. The first assumption: Since the U.S. economy grew at a blistering rate of 8.2 percent during third quarter 2003, inflation will soon heat up, forcing the Federal Reserve to raise interest rates. After all, in fast-growing economies, central banks normally raise interest rates to check inflation; they cut interest rates in weak economies to encourage private investment and consumption to boost economic growth. But this time, inflation isn't heating up during this period of record growth. We will explain why in a moment. The second assumption: The U.S. Federal Reserve will feel pressured to hike interest rates because of the combined weight of record budget and current account deficits. The United States needs foreign investments to finance these twin deficits. However, foreign investors and governments are bailing out of U.S. dollars and U.S. Treasury securities because they can get better yields in euro or yen in the near term. As a result, the Fed quickly must raise interest rates to bring back foreign investors who have traded out of U.S. dollars and securities. Both assumptions are wrong. The U.S. economy's strong growth is not heating up inflation because production increases are the result of productivity gains. Productivity-based growth means that inefficiencies normally associated with rapid increases in economic production greatly are minimized, if not cancelled out completely. If the U.S. economy continues to grow at a blistering pace throughout 2004, it eventually could have some impact on inflation, causing the Fed to make some adjustments in late 2004. However, the Fed likely will elect to leave the target interest rate alone during first half 2004. Moreover, the weak dollar and the budget and current account deficits are not signs of a vulnerable economy. Rather, they confirm robust economic health. A weak dollar means the United States can export more to the European Union and elsewhere. The current account deficit reflects that the U.S. economy is stronger and consumes more per capita than any other economy in the world. In effect, the U.S. trade deficit shows the country is much wealthier than its trading partners and can afford to import more goods. This statement might inflame some Stratfor readers who will point to such matters as EU protectionism or China's exchange rate policy as other causal factors of the trade deficit. It's true, however. Meanwhile in Europe, higher interest rates might be pulling foreign investment out of dollars in the near term and strengthening the euro to record highs against the dollar. However, the EU grew under 1 percent in third quarter 2003 compared with growith of 8.2 percent in the United States during the same three-month period. A stronger euro also means that the European Union cannot exploit substantially higher economic growth in the United States to increase exports to it, but U.S. companies can export more to the European Union. The dollar might have reached a record low against the euro, but this merely is the result of interest rate differentials between the United States and the European Union. More significantly, the unwillingness of EU's central bank to cut interest rates indicates that EU economies are weaker than is generally recognized -- structural inflationary fears are justified in Europe. We've said it before. The EU's essential problem is that its comprehensive social safety net of generous benefits and guarantees is hollowing out the economies of its members. European voters perceive these benefits as entitlements. However, in today's global economy, where productivity-based economic growth appears to be the most effective way to compete against low-wage juggernauts such as China, the EU's social benefits could be described as structural impediments to investment, productivity and economic development. The system also is so costly for governments to maintain that they cannot keep their deficits under the 3 percent ceiling set by the EU's central bank. France and Germany have been staunch, passionate defenders of the euro, but both also will fail in 2003 to keep their budget deficits under the ceiling. The dollar likely will continue to weaken against the euro, but we don't think that is any cause for concern. The U.S. government apparently agrees. During a recent Washington speech, U.S. Federal Reserve Chairman Alan Greenspan obliquely warned the Bush administration to reverse what he described as "creeping protectionism." In effect, Greenspan called for freer markets, hinting at the need to eliminate the inefficiencies that obstruct freer trade and faster growth without higher inflation.