Thursday, March 17, 2005

The new economic miracle...

Otherwise known as "Maccawberism" (Yes the mis-spelling is intentional).

In the great words of Mr McCawber "Income one pound, outgoings nineteen shillings and sixpence; result bliss!! Income nineteen shillings and sixpence, outgoings one pound; result misery!!!"

US Current Account (the international "trading bank balance") USD188 billion overdrawn.

Trade balance for 4th quarter 2004 (the latest released) USD58 billion imports exceed exports.

MOST of the deficit is trade with China. MOST of the US Securities being used to fund the Current Account (total taken up in the last quarter was some USD20 billion) are being bought by Chinese banks and investment houses.

Worried yet?

Warren Buffet of Berkshire Investors -
Buffett has argued since 2003 that this huge trade deficit will eventually bring a sharp decline in the dollar, and he has tried to protect his company's shareholders against that dollar crash by speculating in foreign currencies. But this year, with the trade deficit having ballooned to a record $618 billion in 2004, Buffett's tone is almost apocalyptic.

"The evidence grows that our trade policies will put unremitting pressure on the dollar for many years to come," Buffett writes. "The decline in its value has already been substantial, but it is nevertheless likely to continue. Without policy changes, currency markets could even become disorderly and generate spillover effects, both political and financial." That's careful language, but what Buffett is saying is that America is risking a financial crash -- a bursting bubble -- if political leaders don't do something about the trade deficit.

Buffett phrases his analysis in his usual homespun metaphors. By buying more abroad than we produce at home, "We are like a family that consistently overspends its income," he writes; we are financing this self-indulgence only by writing IOUs that are claims on our future income. Rather than an "ownership society," we are creating a "sharecropper's society" that, by Buffett's calculation, will owe the world $11 trillion by 2015 if we continue on the current course. Servicing that debt would cost $550 billion annually, a payment to the rest of the world that "would undoubtedly produce significant political unrest in the U.S.," Buffett fears.

Alan Greenspan is quoted on the other hand -
Federal Reserve Chairman Alan Greenspan counters that the economy is headed for a soft landing, and the debt owed to foreign investors and savers is no big deal.

...and again in Business Week... and Asia Times
As if this weren't trouble enough for the besieged greenback, US Federal Reserve chairman Alan Greenspan stirred up the market Thursday night saying foreign investors would reduce their US asset holdings at some point, while new findings came to light that China is indeed doing so.

Saying he is not "overly" concerned about the record US trade gap or heavy consumer debt, Greenspan said the budget deficit gives him the shivers. The US current account deficit widened to a record US$164.7 billion from July through September, the most recent figures available, equivalent to 5.6% of gross domestic product (GDP). "Our current account deficit and household debt burdens do not strike me as overly worrisome, but that is certainly not the case for our fiscal deficit," Greenspan told the Council on Foreign Relations in New York. "Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability, because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances."

According to the high priest of finance, international investors have only modestly shifted their portfolios away from dollar assets so far. But he warned that they might at some point decide their portfolios are too dollar-centric, ominously adding that if the dollar keeps dropping, foreign exporters may start looking elsewhere.

When you have leading investors (and I could probably find quite a few more than just Mr Buffet) giving consistent warnings that directly counter the head of the Federal Bank not only is someone wrong, someone is horribly wrong!

I regret to say that the spin coming from the Greenspan camp sounds distinctly like the confident pronouncements that were being made by the Muldoon government here in NZ just before the watermelon struck. It took over twenty years to pay off the debts from that fiasco.

1 comment:

Aleksu said...

Well, the USA thought they could weather it by themselves.

The China is about to break.