US dollar slide to continue
The US dollar is set to continue its fall on money markets around the world. While the fall of the dollar has been one of the main topics of discussion in banking and financial circles over the past months, it was not on the agenda at the meeting because of disagreements between the US and Europeans.
While the European powers are concerned that the falling dollar will hit their exports, resulting in slower economic growth, the US is insisting that no co-ordinated action need be taken on exchange rates and that they should be determined by market forces. The Europeans maintain that the falling dollar is caused by the record US fiscal and balance of payments deficits and that the Bush administration should put its economic house in order.
The US, on the other hand, declares that the imbalances in the world economy, reflected in the US deficits, are caused by low European growth rates which need to be overcome through restructuring and greater scope for the operation of market forces.
Answering critics of the Bush administration, treasury secretary John Snow said the US was committed to cutting the budget deficit in half over the next four years, insisting that all countries were responsible for boosting growth and correcting trade imbalances. Growth among our trading partners including those here in Europe also needs to increase and that requires addressing structural barriers in the way of better performance.
Earlier German chancellor Gerhard Schroeder had rebuffed US criticism by pointing to the record American deficits. You can hardly demand from the Europeans to constantly carry out structural reforms which we are doing without addressing your own needs, he said.
As a result of the conflicts, the communique which emerged from the meeting committed nobody to anything. We underscored the importance of medium-term fiscal consolidation in the United States, continued structural reforms to boost growth in Europe and Japan, and, in emerging Asia, steps towards greater exchange rate flexibility, supported by financial sector reform, as appropriate, the statement said.
The G20 may have decided to sit on its hands, but the problem is not going to go away. In an address to a European banking meeting on the eve of the G20 meeting, US Federal Reserve chairman Alan Greenspan explained that at a certain point the inflow of funds needed to finance the American deficit will dry up, prompting a rise in interest rates.
Posing the question as to how long the US current account deficit, now running at around 5 percent of gross domestic product (GDP) could continue to be financed from foreign sources, Greenspan offered the reassurance that at present there was only limited evidence of problems with inflows.
But the US could not continue to accumulate foreign debt indefinitely, he warned. Net debt service costs, though currently still modest, could eventually become burdensome. At some point diversification considerations will slow and possibly limit the desire of investors to add dollar claims to their portfolios.
At a certain point, he continued, the dollar holdings of foreign investors would become so large that they would represent an unacceptable amount of concentration risk, leading to a withdrawal of foreign funds along with increased interest rates in the US.
The structural imbalances in the US and global economy have also been highlighted by former US treasury secretary Lawrence Summers. In a lecture delivered on October 3, he noted that running at more than $600 billion annually and in the range of 5.5 percent of GDP, the US current account deficit represents more than 1 percent of global GDP and absorbs almost two-thirds of the cumulative current account surpluses of the worlds surplus countries.
All these figures are without precedent. The United States has never run such large current account deficits and no single nations deficit has ever bulked as large relative to the global economy, he said.
Summers explained that even if the global economy grew in a balanced way, with imports and exports rising in proportion to the size of the global economy, the US balance of payments deficit would continue to grow.
This is because US imports are around 16 percent of GDP while exports stand at 11 percent. Furthermore, the US has a higher propensity to import than its trading partners. This means that even if the US and its trading partners grow at the same rate, US imports will increase at a faster rate than exports, thereby widening the balance of payments deficit.
Noting the increasing role of the East Asian central banks in financing the US deficit they currently hold around $1.8 trillion in foreign currency reserves Summers drew attention to what he has previously described as the balance of financial terror that maintains the world financial system. On the one hand the US depends on an ever-larger inflow from the Asian banks to finance its deficit, while on the other the lenders, despite incurring losses on their investment and exposing themselves to greater financial risk, are afraid to withdraw their funds lest they set off a financial crisis.
Summers, who was involved in setting up the G20 in the late 1990s, said it would be the appropriate forum to consider issues of global economic coordination and the development of a global economic strategy for sustained growth.
With a membership covering countries that embody 90 percent of the global economy, the G20 would appear, on the face of it, to be the body where such coordination would be developed. But judging from the results of last weekends meeting, the divisions between the major economic powers mean that such co-operation is impossible. Indeed, the conflicts appear to be deepening.
In an analysis of the G20 meeting, an article in the Australian Financial Review noted: Squabbling at the weekends G20 finance ministers meeting and unusually candid comments from ... Alan Greenspan can only mean one thing: Americas unilateralism under President George Bush has extended beyond foreign policy to economic policy. Having lost hope that market-opening reforms on Europe and Japan that will boost exports and reduce its current account deficit, the US is taking matters into its own hands.
The US, the comment continued, would pursue its own agenda through a lowering of the dollar and higher interest rates, forcing governments and central banks around the world to accommodate themselves to its demands. The US knows what it needs, and Japan and the Europeans can moan all they like.
Signs of increased tensions were clearly in evidence in the wake of the G20 meeting. In an interview with the Financial Times published today, the deputy governor of the Peoples Bank of China, Li Ruogu, made it clear that China would not be rushed into revaluing its currency a central demand of both the US and the European powers.
Ruogu warned the US not to blame other countries for its economic difficulties. Chinas custom is that we never blame others for our own problem. For the past 26 years, we never put pressure or problems on to the world. The US has the reverse attitude, whenever they have a problem, they blame others, he said.
Chinas trade surplus with the US was more than $120 billion last year and has been increasing at a record rate, rising by more than $15.5 billion in September and $15.4 billion in August. The US has been demanding that this imbalance be addressed through an upward valuation of the yuan and eventually full currency flexibility. But Chinese authorities fear that if the present regulatory regime is abandoned too quickly this will lead to a crisis in the banking system where some estimates put the level of bad loans at 40 percent of Chinas GDP.
SPIRALING DOWN THE VORTEX OF ECONOMIC DISASTER
It's the American way. If you have a job, it looks fairly secure, and you aren't hurting, then all is right with the world, barring a terrorist attack or natural disaster such as hurricane, major earthquake or massive flooding.
The signs I'm reading are all there, you just have to take your internet browser off the sports page, off the local newspaper, off the weather forecast and out of the chatrooms and get to the wire services to check the breaking news. My experience with breaking news is that very little of it reaches the public via major media radio or television updates, or the local newspapers.
One company after another is announcing earnings difficulties, layoffs or restructuring or a possible merger. This is not limited to America. Toyko, Hong Kong, London, and other major stock exchanges are feeling the impact of the global recession. And I beg to differ on the terminology used by the press for the condition of Argentina. It is not in a recession, it is in financial collapse.
One of the largest problems we have here in the United States is that with our population explosion, much of it from immigration legal and illegal, is that we've priced ourselves out of our own reach, our companies are moving operations elsewhere, taking the jobs with them.
That leaves us with a diminishing base for providing the tax dollars required to operate the government, which is oversized, hog-fat and growing. Average US workers are maxed out on their ability to survive inflation without defaulting on their own debts. Yet we have inflation, and anyone who says we do not has been working with fuzzy math and ignoring the prices in the supermarkets and the price of housing.
We're not the worlds greatest producer of goods except in a few areas, such as food, and we're being overtaken in those areas by some developing and exporting nations.
Many Americans cannot afford to retire in America, so they seek refuge in other countries. Those whose incomes were not large enough to make any significant investments during their working years, or whose savings were consumed by major illness or other factors, can no longer live on next-to-nothing as our grandparents did.
There is a definite coorelation between the price of goods and services and the amount of government intervention in any area. Medical care was affordable until the Medicare fiasco, now it is out of sight and threatening to disappear for all but the wealthy. Of course this is political fodder for the various parties, since they have to provide something for everybody (two-thirds less government would be the best solution).
Private land is being gobbled up by government land grabs at a time when the nation needs more affordable land for folks to live on and develop. I'm not talking about building condos on the edge of the Grand Canyon or new housing with a bedroom view of Old Faithful. Land grabs are taking place all across the country, and restrictions on how folks can use the land they've owned for years are robbing them of their ability to sustain viable ownership.
Rather than keeping our nation economically independent of other nations, we've become so economically globalized (and not by accident) that what happens in Tokyo, Hong Kong, Germany, London, Singapore, Argentina, Venezuela and the Middle East affects us even when we cannot see or feel it.
The best strategy for world takeover by those who want to do just that is to engineer a world economic collapse. America's stature as a "superpower" which is more myth than fact, just like Hollywood's life of imagery rather than reality, depends on our national retention of the ability to produce, and a domestic and international market for our goods and services.
This may seem like dull stuff, but if you think about it, everything you do in your daily life depends on government policies, regulations, and the economic health of our nation. Any kind of planning on the part of individual Americans depends on the health of the economy as well as the security of the nation. People who can't afford food and housing don't save for their future and they don't take vacations or go to expensive sports events or entertainment spots. They can't buy new automobiles or appliances. They can't retire.
It's difficult to tell folks in this generation that we were once, within the past fifty years, a people who could live on very little income. One commentator said that in the 1950's, a head of household making only minimum wage could provide for 90% of the needs for a family of four. No, they didn't live in the kind of new homes we now have for sale, they live like my grandparents did in the 1940's.
Kids who wanted to go to college earned their way through and learned to be extremely frugal. A trip to the doctor cost about $4 and if he knew you were poor, he cut a buck off the bill and still lived well above average because the trial lawyers hadn't discovered malpractice suits and other litigation as a way of getting windfall riches (more for themselves than their clients).
But the major factor was that in the 1950's, we did not have much government intervention in private life. We had mandatory Social Security deductions and income taxes, but people could be poor and live relatively well, but not with today's gadgets (most of which I don't own). Folks could also be poor and free to live off any land that had been handed down to them by previous generations.
America cannot go back to this way of life voluntarily, and probably not at all. With today's globalization of financial interests, a crash in any particular area of the globe could send us all tumbling over the edge. Urbanization is being forced on us at a time when more than ever the able-bodied need to be self-sufficient.
Yet there's no move on the part of our government to help the nation recover by shutting its open-door immigration policies, refusing to grab off more land, rescinding stupid laws (that would take a few Congresses to do) and restoring individual rights and freedoms.
Economics is always dull until it hits home via the paycheck or absence of one, or the sudden realization that the family is without health care and other vital needs. Since we've been the Land of the Endless Entitlements since 1965, at least two generations have never lived any other way.
Many people don't even realize there is no such thing as a Social Security lockbox for your deductions ... they aren't going to you, they're paying today's retirees. If you are working, then those working when you retire will have to pay your Social Security, if they can.
If the next act of terrorism (and we've been promised by our own administration that it's coming) cuts off our commerce and paralizes our capacity to produce and distribute, then our financial collapse will send the whole world spiraling down the vortex of economic disaster.
One world government isn't that hard to achieve today ... terrorism is far more effective than conventional warfare at bringing down economies. Now ... who holds the super power? Figure it out. Stumble It!
Tuesday, March 01, 2005
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