Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (15091)	11/8/2004 12:46:23 AM
From: RealMuLan	Read Replies (1) \| Respond to of 116555

Economic reality is lurking By STEVEN PEARLSTEIN Columnist Congratulations, Mr. President. Take some time off, relax, clear your mind, because when you come back, you'll face some big challenges. Replacing some people on your team. Managing a victorious withdrawal from Iraq. And, oh yes, dealing with an economy headed back into the ditch. Yes, I know that's not the consensus forecast. After all, the economy looks to be in pretty good shape right now. Economic growth will probably come in at a respectable 4 percent for 2004, while the global economy will have its best year in decades. Core inflation is around 1.5 percent. Corporate profits are up about 20 percent for the second year running, providing the cash for a respectable, double-digit increase in capital spending. Unemployment is drifting downward. Unfortunately, this is probably the best year we're going to have for some time, a result of some lucky breaks, a modest decline in the value of the overpriced dollar, continued high productivity and an enormous amount of fiscal and monetary stimulus. The heavy dose of stimulus is unsustainable, and wearing off in any case. Our luck ran out with the escalating cost of the Iraq war and $50-a-barrel oil, even if it doesn't stay quite that high. The benefit from all those productivity gains just isn't translating into more jobs or higher incomes, except maybe in India. And the structure of the U.S. and global economies is such that a falling dollar hasn't spurred exports or dampened our appetite for imports as much as expected. The most likely scenario is that growth will fall to 3 percent next year and below 2 percent in 2006, with few gains in employment and gradually rising inflation — a mild form of stagflation that carries with it a chance of recession. The underlying reason is pretty simple: For 13 years, the United States has been living beyond its means. Because ours is the largest and most dynamic economy in the world, and because the dollar is the world's reserve currency, the self-correcting mechanisms of the global economy haven't forced things back into balance. We printed lots of dollars and Treasury IOUs, and foreigners keep lending us money at reasonable rates to buy their stuff, even though it leaves them with big stashes of dollars that are about to depreciate before their eyes. What we never did was solve the basic problem, irrefutably expressed in our record federal budget deficit and current account deficit. Now the evidence is mounting, from financial markets and the real economy, that we can't continue to get by with policies that make the underlying problems even worse. The only question is whether we will manage the adjustment process — how the burden is distributed, what form it takes — or leave it to the markets to do it for us. Unfortunately, you have spent the past year essentially denying this reality, basing your campaign platform and budget plan on what are unrealistic economic assumptions. So as presidents-elect did in 1992 and 2000, you'll need to emerge from the next meeting with your economic advisers to acknowledge that things have changed and that you'll be working up a new plan to deal with it. Such a plan starts with persuading China to begin raising the value of its undervalued currency in exchange for a seat at the G-7 conference table — or face the prospect of temporary tariffs. Then you'll have to come up with a bold but fair package to wipe out the budget deficit in four years through some combination of tax increases, service and benefit cuts, and restraints on health care spending for public and private sectors. To accomplish this, you'll have to move beyond your political base and fashion a working majority anchored by moderates of both parties. Fix the plumbing and you'll be surprised how easy it is to win the contract to redesign the house. Steven Pearlstein writes for The Washington Post. kansascity.com