econ outlook 2005

Re: [spiers] econ outlook 2005

Hi John and all folks from this group!
Happy all of us with Holidays and New Years!!!
This article is one of many precautious info from around the globe.Yes, many
depressed facts pop-up in foreign press. And on some kind of economic
conferences. Chaotic conditions of US economy is Very dangerous.... . John
I'm waiting for your review.
Alex.
Hrusha.
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Sent: Thursday, December 30, 2004 2:25 PM
Subject: [spiers] econ outlook 2005


>
> Folks,
>
> Here is a fascinating summary by a man who shoould know, and does, and
after a few days I want to take his article apart section by section with my
review of what it means for us at the small business level.
>
> As we start the new year, I'll say it again, being self-employed is about
supporting your chosen lifestyle... doing well and doing good. And by
lifestyle I am thinking along the lines of Maslow's heirarchy rather than
some particular orientation.
>
> Anyway, here we go,,,
>
> THE MISSING LINK
> by Dr. Kurt Richebächer
>
> The badly flawed consensus thinking about the implications of sustained
large U.S. capital inflow starts with the error that U.S. assets are
uniquely attractive to foreign investors. The reality is that U.S. investors
are earning far higher returns on their assets in Europe and Asia than
foreign investors do on their U.S. assets. European firms and investors who
invested heavily in the United States during the "new paradigm" years in the
late 1990s are still smarting from horrendous losses. The DaimlerChrysler
disaster is by no means an isolated case.
>
> As to U.S. bond yields, they are just marginally above euro yields, but
considerably below the yields obtainable in emerging countries. What is
more, after inflation, they are the lowest in the world. A falling dollar
is, of course, a virtually prohibitive deterrent to foreign bond purchases.
In fact, it might induce selling.
>
> This leaves the central banks of Asian surplus countries as the potential
buyers of last resort for the dollar, unwanted by private investors. They
did heavy dollar buying in 2003 and in early 2004, but never forget, the
dollar purchases by the central banks have a heavy price in turning healthy
economies into sickly bubble economies.
>
> The sustainability of the U.S. capital inflows is, actually, the totally
wrong question to ask from the American point-of-view. Far more important is
another question, concerning the effects of the trade deficit on the U.S.
economy, in particular on employment and income creation. We find that the
dogmatic belief in the mutual benefit of foreign trade has stifled any
reasonable discussion in this respect.
>
> The benefits for the surplus countries are obvious. Exports in excess of
imports create higher employment, higher profits and higher incomes. But
what are the benefits to the United States? Frankly speaking, we do not see
any true benefit of a trade deficit. What the American "mutual-benefit"
apostles fail to see is that a balance in benefits essentially presupposes a
balance in the underlying trade.
>
> Yet there is a widespread view that the flood of cheap imports, by keeping
a lid on U.S. inflation and wage pressures, fosters lower interest rates,
which tend to spur economic growth.
>
> For us, both effects are not beneficial at all, because the imports
implicitly distort both inflation rates and interest rates to the downside.
In essence, the lower inflation rates allow a looser monetary policy than
domestic conditions justify. For Greenspan and many others wanting the
loosest possible monetary policy, this was certainly a highly esteemed
effect of the trade deficit. For us, it is insane.
>
> Nobody seems to realize the enormous damages that the egregious trade
deficit has inflicted on the U.S. economy. Indisputably, it diverts U.S.
demand from domestic producers to foreign producers, and this implies an
equivalent diversion of employment and associated income creation from the
United States to these countries. That is the manifest direct damage of the
trade deficit to the U.S. economy, the obvious main victim being the
manufacturing sector, with horrendous job and income losses.
>
> Blinded by the dogma of compelling mutual benefits; policymakers,
economists, investors and the American public flatly refuse to see this
disastrous causal connection. The alternative explanation is that America's
extremely poor job performance has its main cause in the highly desirable
high rate of productivity growth.
>
> It is a convenient, but foolish explanation, reminding us of the early
days of industrialization, when people destroyed machinery for fear of
unemployment. For us, productivity growth that destroys millions of jobs is
definitely suspect as a mirage. Historically, strong productivity growth has
always coincided with strong capital investment involving, in turn, strong
employment growth in the capital goods industries.
>
> That is presently, of course, precisely the missing link in the U.S.
economic recovery. (As an aside, in a healthy economy with adequate savings,
cutting labor costs generally takes place through investment, not through
firing.)
>
> The job losses from the soaring trade deficit have always been there. But
they did not show up in the aggregate for many years because the booming
economy - driven by extremely loose monetary policy - created sufficient
alternative jobs. But this alternative job creation has drastically abated
since 2000, and the soaring trade deficit's damage to manufacturing is now
surfacing in full force.
>
> Having said this, we hasten to add that the U.S. trade deficit must be
seen as one imbalance among several others, whether zero or even negative
national savings, a soaring budget deficit, record-low net capital
investment or sky-high consumer debt. They all derive from the same
underlying key cause: Unprecedented credit excesses that have boosted
consumption for years at the expense of capital formation.
>
> What governs the U.S. trade deficit is not the law of "comparative
advantages," but the careless depletion of domestic saving and investment
resources though policies that have recklessly bolstered consumption.
Essentially, employment creation through capital investment is out. Putting
it bluntly, the U.S. trade deficit, like all other imbalances, reflects a
grossly skewed resource allocation toward consumption.
>
> To American economists, this idea that over time, excessive consumer
spending leads to recession and worse, by crowding out capital investment
may seem preposterous. Widely unknown, it happens to be the central idea
that F.A. von Hayek developed in his famous lectures at the London School of
Economics in 1931.
>
> In essence, he explained in great detail that an increase in consumer
demand at the expense of saving will inevitably lead to a scarcity of
capital, which forces a "shortening in the process of production," and so
causes depression. Putting it in simpler parlance: Excessive consumption
inevitably crowds out business investment. As a share of GDP, consumption in
the United States is presently excessive as never before. And it keeps
worsening.
>
> Assessing the U.S. economy's prospects, it also has to be realized that
the bubble-driven consumer-spending boom represents artificial,
unsustainable demand. Apocalypse will follow when the housing bubble
bursts - which is sure to happen in the near future.
>
> As the Boston Herald recently reported: "[Stephen] Roach met select groups
of fund managers downtown last week, including a group at Fidelity. His
prediction: America has no better than a 10% chance of avoiding economic
'Armageddon'... Roach's argument is that America's record trade deficit
means the dollar will keep falling. To keep foreigners buying T-bills and
prevent a resulting rise in inflation, Federal Reserve Chairman Alan
Greenspan will be forced to raise interest rates further and faster than he
wants. The result: U.S. consumers, in debt up to their eyeballs, will get
pounded."
>
> We could not agree more. Our particular nightmare is that the huge carry
trade bubble in bonds will inevitably burst in this process. A fire sale of
bonds in unimaginable proportions would begin, with bond prices crashing and
yields soaring. With the prices of housing, stocks and bonds crashing, the
entire U.S. financial system would be at risk.
>
> It is typically argued that the U.S. economy is importing too much in
comparison to exports. Superficially, that is true. Yet on closer look, it
is a mistaken perception. Compared to other industrialized countries, U.S.
imports are very low as a ratio of GDP. The true key problem is abysmally
low goods exports, accounting lately for barely 7% of nominal GDP. This
compares, by the way, with a German goods export ratio of 35% of GDP.
>
> The next implicit question is the cause or causes of this extremely low
U.S. export ratio. The answer is strikingly obvious. It is precisely the
same cause that chokes productive capital investment - the progressive shift
in the allocation of available domestic resources away from capital
formation through saving and investment in plants and equipment, and toward
immediate consumption.
>
> That is the supply-side problem. Yet there is a demand-side problem, too.
Greenspan and others like to boast that America is creating growing demand
for the rest of the world. The ugly truth, rather, is that U.S. monetary
policy has been excessively loose in relation to potential domestic output,
because Greenspan has wanted maximum economic growth for years. But lacking
domestic output capacity to meet the soaring domestic demand, an increasing
share of the demand creation from monetary excess exited to foreign
producers, resulting in the huge U.S. trade deficit.
>
> It is a flagrant policy failure that has created a monstrous,
unsustainable imbalance, both domestically in the United States and
globally. However, for years, American policymakers and economists have
glorified this deficit as America's great contribution to world economic
growth. But the day of reckoning is rapidly approaching.
>
> Regards,
>
> Kurt Richebächer
> for The Daily Reckoning

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