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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (15471)	12/14/2003 5:51:42 PM
From: biometricgngboy	Read Replies (1) \| Respond to of 306849

ECONOMY Beware the 10,000 Dow By STEVEN PEARLSTEIN Washington Post 12/14/2003 WASHINGTON - Thanks to massive government stimulus - tax cuts, deficit spending and record low interest rates - the U.S. economy is in for a nice run over the next year, which will make most Americans feel richer and more economically secure. Hooray for the 10,000 Dow. Unfortunately, folks, we're not as well off as we think we are. And how that reality finally asserts itself will be the driving force in the U.S. and global economies over the coming decade. Let's start with the basic fact that Americans are in hock - big time. We consume more than we produce, invest more than we save and demand more in the way of government services than we are willing to pay for - to the point where the shortfall now amounts to 5 percent of what we produce each year. For a generation, the rest of the world has been willing to finance this profligacy, either by lending us the dollars they earn selling us goods or by buying our corporate stock and real estate. The arrangement was mutually beneficial, allowing foreigners to avoid facing up to different structural problems in their own economies. But now there are signs we've all played out this unsustainable arrangement about as far as we can. The obvious symptom is the sharp decline in the value of the dollar in recent months. Other indicators include sky-high trade and budget deficits and a dramatic slowdown in foreign investment. And just over the horizon, in my opinion, lie pickups in inflation and interest rates, and the bursting of the real estate bubble. Because of the interplay among these factors, it is often difficult to figure out which is cause and which is effect. But what's important to keep in mind is that they are all symptoms of the same fundamental imbalances, and the global economy's natural efforts to deal with it. For Americans, that process of adjustment will take many forms, all of which eventually translate into a lower standard of living. Higher interest rates, for example, lead to slower growth, higher unemployment and lower incomes for households and corporations. Higher rates also force governments to spend more of their revenue on debt service, leaving less for valued services. A falling dollar leads to higher prices for imported goods, lowering inflation-adjusted incomes. And slower growth and higher interest rates almost always result in lower prices for real estate, stocks and other financial assets. Government policies had a lot to do with creating the imbalances, and they will have a big impact on the timing of the coming adjustments as well as on how the pain is spread, both among countries and within them. Efforts by China and Japan, for example, to prevent their own currencies from rising against the U.S. dollar are putting extra upward pressure on the euro, the Canadian dollar and the Mexican peso, dampening short-term growth in those economies. And how fast the Federal Reserve allows prices to rise will determine to what degree debtors will be allowed to pay back their obligations in inflated or devalued dollars. In the face of a growing budget deficit, Congress and the president will have to decide whether to raise taxes, cut back further on government services or foist the problem onto future generations. The best outcome that we could expect from all this would be that the adjustments are gradual enough to simply reduce the pace of economic growth modestly over the next decade. The bad outcome would be that the adjustments accelerate and begin to feed on themselves, resulting in a series of rolling global recessions, trade wars and a long bear market. Over the coming year, charlatans will be out in force peddling the idea that if we just cut taxes here, or privatize and deregulate over there, we can grow our way out of the hole we're in. Don't believe it for a Texas minute. The hole is too deep, and the imbalances too ingrained, to count on painless solutions. buffalonews.com