Wednesday, November 24

Not looking good for this household…  

nor for any other household in the US.

As a follow up to this, we have a report from Slate about the current Treasury of State (and former CSX raper?) John Snow:

Being John Snow - The treasury secretary believes in a strong dollar. He also believes in Santa Claus.

Buried among Snow's bromides was a massive contradiction about the dollar. The United States is in favor of a strong dollar, Snow said, because it's in favor of a strong dollar. Always has been. Always will. America is strong and so must its dollar be. But the United States, which favors free markets, also insists that the value of the dollar be set through competitive markets. In other words the United States wants a strong dollar in principle, but it also wants the dollar to weaken against the propped-up Chinese yuan, so that the trade gap narrows.

The market scoffed at Snow. As he spoke, the dollar plunged to a new record low against the euro. Snow's performance worsened during question time. When an audience member had the temerity to ask why Snow persisted in discussing the strong dollar policy while the greenback was plummeting, he simply responded "because it's our policy." Challenged again, he reiterated: "The policy is the policy."

Why do our officials bother to say that we're for a strong dollar, when we're plainly not? It has to do with our self-image—no country worth its salt openly says it wants its currency to be weak. But even economic policymakers as obtuse as Bush's should know by now that you can't make the dollar strong by talking about it. If a government is seriously interested in strengthening the path of the dollar, it can control spending and cut the deficit—policies this administration seems notably uninterested in.

It must be nice to be taking one for the team like this. "Keep saying this to placate the fools, while we do the absolute opposite!"

This is not good fiscal policy that we are seeing. Is it even a fiscal policy? Or is this a suicide run of lemmings?

Then we have from the Boston Herald:

Economic `Armageddon' predicted. Now this is from Stephen Roach, the head economist of Morgan Stanley, and I understand that he is pretty much always bearish, but reading this should give any red-blooded American pause to think what is probably going to be in our near future.

Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish.

But you should hear what he's saying in private.

Roach met select groups of fund managers downtown last week, including a group at Fidelity.

His prediction: America has no better than a 10 percent chance of avoiding economic "armageddon."

Press were not allowed into the meetings. But the Herald has obtained a copy of Roach's presentation. A stunned source who was at one meeting said, "It struck me how extreme he was - much more, it seemed to me, than in public."

Roach sees a 30 percent chance of a slump soon and a 60 percent chance that "we'll muddle through for a while and delay the eventual armageddon."

The chance we'll get through OK: one in 10. Maybe.

In a nutshell, 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, who are in debt up to their eyeballs, will get pounded.

Less a case of "Armageddon," maybe, than of a "Perfect Storm."

Roach marshalled alarming facts to support his argument.

To finance its current account deficit with the rest of the world, he said, America has to import $2.6 billion in cash. Every working day.

That is an amazing 80 percent of the entire world's net savings.

Sustainable? Hardly.

Meanwhile, he notes that household debt is at record levels.

Twenty years ago the total debt of U.S. households was equal to half the size of the economy.

Today the figure is 85 percent.

Nearly half of new mortgage borrowing is at flexible interest rates, leaving borrowers much more vulnerable to rate hikes.

Americans are already spending a record share of disposable income paying their interest bills. And interest rates haven't even risen much yet.

You don't have to ask a Wall Street economist to know this, of course. Watch people wielding their credit cards this Christmas.

Roach's analysis isn't entirely new. But recent events give it extra force.

The dollar is hitting fresh lows against currencies from the yen to the euro.

Its parachute failed to open over the weekend, when a meeting of the world's top finance ministers produced no promise of concerted intervention.

It has farther to fall, especially against Asian currencies, analysts agree.

The Fed chairman was drawn to warn on the dollar, and interest rates, on Friday.

Roach could not be reached for comment yesterday. A source who heard the presentation concluded that a "spectacular wave of bankruptcies" is possible.

Smart people downtown agree with much of the analysis. It is undeniable that America is living in a "debt bubble" of record proportions.

But they argue there may be an alternative scenario to Roach's. Greenspan might instead deliberately allow the dollar to slump and inflation to rise, whittling away at the value of today's consumer debts in real terms.

Inflation of 7 percent a year halves "real" values in a decade.

It may be the only way out of the trap.

Higher interest rates, or higher inflation: Either way, the biggest losers will be long-term lenders at fixed interest rates.

You wouldn't want to hold 30-year Treasuries, which today yield just 4.83 percent.

Good thing everybody got those rates locked in now. Of course, you may be wishing that you had gone for that 30 year loan.

Permanent link posted by bytehead @ 11/24/2004 03:24:00 PM    0 comments Links to this post

0 Comments:

Post a Comment

Links to this post:

  <$BlogBacklinkTitle$>  

<$BlogBacklinkSnippet$>
posted by <$BlogBacklinkAuthor$> @ <$BlogBacklinkDateTime$>

Create a Link