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Sunday, December 05, 2004

Weekend Economic Roundup

People are coming out of the woodwork screaming The sky is falling, the sky is falling! Very Y2Kish, granted, and I'm not a fan of conspiracy theories or end of the world scenarios. But I think we all need to be listening this time.

The best advice I read this week --- and of course, I've forgotten where --- was a comparison of our current situation with that of Japan some years back. In essence, when Japan's housing bubble burst, values on properties dropped as much as 80%. Which completely invalidated the commonsense dictum that real estate doesn't devalue because they're not making any more land.

Yes, real estate values can drop through the floor.

The difference between our situation and that of Japan, however, is that the average Japanese person had sizeable personal savings --- cash stashed for emergencies and the future. And most Americans don't. And most Americans don't because their *cash* is stashed in assets --- specifically real estate. Their homes. And those homes are overvalued. So when the housing bubble bursts, there goes all their money. Stephen Roach, I believe, likens the consequences to the crash of 2001, when the dot.coms sank and the stock market went down with the ship.

Except this time, it's going to be worse. Much worse.

I will post links to relevant articles on this post throughout the day, Click the 'More here ... ' link to read them.

The New York Times has a mixed review of our dilemma, stating:

"The answer is not quite as simple as "less imports, more exports." Depending on how investors behave, the dollar's downward drift could cast anything from a benign breeze to a hurricane.

If the dollar loses value slowly, giving businesses and investors plenty of time to adjust their spending and portfolios, the main effect may be to make the American economy more competitive. That would be a happy conclusion.

But if the dollar takes an abrupt dive, the consequences may be dire. Companies and consumers alike may find themselves stripped of purchasing power and ground down by sky-high interest rates."

Bloomberg has a couple of articles on the situation. Neither is particularly optimistic, although their commentators are not yet preaching doom.

New Yorker via Progressive Blog Digest:
"Bush’s bankrupt economy:
"The dollar’s fall, along with the trade and budget deficits, is a classic symptom of a country living beyond its means. Twenty years ago, American households saved about nine cents of every dollar they earned; today, they save less than a penny. The federal government is spending about four hundred billion dollars a year more than it raises in taxes, which means that the Treasury has to sell about thirty-four billion dollars’ worth of bonds every month to remain solvent. . . The system worked for a while, but, at some point, all countries have to pay their own way, which means restoring the trade balance and paying down debts. One way to do this is to cut back on imports by reducing consumer spending, but this would probably require a recession. The only other option is to devalue the currency, which makes imports more expensive and exports cheaper.

"In recent weeks, John Snow, the Treasury Secretary, and Alan Greenspan, the Federal Reserve Board chairman, have made statements that can be interpreted as attempts to devalue the dollar. Not surprisingly, their comments prompted more selling on the foreign-exchange markets. But debasing the dollar is a high-risk strategy. Currency movements tend to be self-reinforcing. If traders come to see the dollar as a one-way bet, its slide could turn into a rout. During the past decade, record trade deficits, soaring foreign debts, and prolonged fiscal irresponsibility presaged full-blown currency crises in Mexico, Russia, Brazil, and many other countries. The crises eventually erupted when foreign investors rushed to get their money out of the stricken countries. If that were to occur here, the Federal Reserve would be forced to raise interest rates in order to stop the panic selling, which, in turn, would torpedo the stock and the real-estate markets. The economy would be plunged into a deep recession.

"Given the dollar’s unique status as an internationally accepted means of exchange, many economists doubted that such a catastrophe could befall the United States. Now they are not so sure. Russia just announced that its central bank might change some of its dollar reserves into euros, and rumors persist that Saudi Arabia and other Middle Eastern oil producers will soon begin to set oil prices in euros, a move that would undermine the dollar’s privileged status. Most ominously, the Bush Administration has alienated some of the dollar’s biggest supporters by trying to deflect responsibility for America’s growing financial dependency onto China and other low-cost producers. Last week, Li Ruogu, the deputy governor of the People’s Bank of China, told the Financial Times, “China’s custom is that we never blame others for our own problem. The United States has the reverse attitude. Whenever they have a problem they blame others.”

"Ultimately, the value of a currency is an international verdict on the honesty and competence of the government that issued it. President Bush may have recovered in the domestic polls, but in the currency markets his ratings are still falling. And, with his Administration determined to pursue further tax cuts and costly Social Security privatization, his numbers don’t seem likely to turn around soon."

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