Re: [A-List] US fiscal crisis

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Keaney Michael wrote:

> Hamish McRae: US spending spree could spell trouble for the dollar
> By 2006, the US may need to borrow abroad to pay the interest on its
> overseas debt. That way lies disaster
> The Independent, 14 March 2002
>
> The faster the US economy turns up the better for the rest of the
> world - but the worse for the still-massive imbalance in the country's
> external accounts.
>
> There is little doubt now that, thanks to the determined spending by
> American consumers through the last part of last year, some sort of US
> recovery is in place. The consumer should keep spending as job growth
> has resumed and unemployment may start to fall - job insecurity was
> one of the main forces that potentially undermined the consumer boom.
> It looks pretty clear too that US-led growth will spread to Europe and
> East Asia. Business confidence is rising in both regions, though this
> has yet to
>
> But this good news carries dangers, for US growth, however welcome,
> will increase the US current account deficit and hence the US
> dependence on capital imports. In a sense the US needed a proper
> recession in order to correct this imbalance. It has only experienced
> a very brief one - on the usual definition maybe not one at all - and
> so has not had time to make the adjustment.
>
> The widening current account deficit over the past 20 years is shown
> in the top graph, together with some Goldman Sachs forecasts for the
> deficit to 2006. The deficit is now equivalent to 4 per cent of GDP
> and Goldman forecasts that it will grow to 6 per cent of GDP in four
> years' time.
>
> The effect of this string of deficits has been to turn what was, 20
> years ago, the world's largest creditor nation into the world's
> largest debtor, as the middle graph shows. Looking ahead the situation
> gets much worse. External debt would on these current account
> forecasts would approach 50 per cent of GDP.
>
> You can argue reasonably enough that much of the build-up over the
> last few years has simply been a reflection of the perceived strengths
> of the US economy. It is a place where foreigners - individuals,
> investment funds and corporations - want to put their money. Provided
> both performance and confidence is maintained there is no reason why
> this flow of money should slow, let alone be withdrawn. And there are
> several reasons to expect that the superior underlying growth
> performance of the US vis-
>
> But look where the money is going (bottom graph). Some of the
> additional money has gone into equities, with the result that
> foreigners now hold around 12 per cent of US shares. Some has gone
> into corporate bonds, where the holding is some 24 per cent of the
> total. But proportionately the largest amount is in short-term US
> treasury securities, where some 37 per cent are now foreign owned.
>
>
>
> Goldman's point is that this is not sustainable.
>
> Now Goldman made the same point - as many of the rest of us have - in
> 1999 and look what has happened: far from weakening the dollar has got
> stronger. The reasons for that are well known. Neither the yen nor the
> euro are attractive because of the relatively poor performance of the
> Japanese and eurozone economies. Sterling, the only other significant
> candidate, has been held down in part by fears that it might at some
> stage enter the eurozone.
>
> But just because an expected adjustment has not taken place yet does
> not mean that it will never take place. The greater the foreign debts
> the greater the payment of interest to the holders of that debt. If
> the Goldman team is right there could be a deficit equivalent to 1 per
> cent of GDP on investment income by 2006. The US would be borrowing
> abroad to pay the interest on its overseas debt. That way lies
> disaster for the debt suddenly runs away with you. The Goldman
> conclusion is that "the long
>
> But when, oh when? A general rule in financial markets is that things
> take longer to happen than you would expect and then occur more
> suddenly.
>
>
>
> My guess is that any big adjustment is still a couple of years' off.
> The alternatives, in particular the euro and the yen, have to look
> more attractive than they do now. There would have also to be some
> trigger, some external shock that would suddenly make the US seem a
> less safe haven for foreign funds. Such shocks, by their very nature,
> are impossible to predict. The core point is that the longer the
> adjustment is delayed the more likely it is that it will come suddenly
> and with greater force.
>
> And of course from the point of view of the world economy a slightly
> weaker dollar would be most welcome - while a sharply weaker one most
> certainly would not.
>
> Full article at:
> http://news.independent.co.uk/business/comment/story.jsp?story=274182
>
> Michael Keaney
> Mercuria Business School
> Martinlaaksontie 36
> 01620 Vantaa
> Finland
>
> michael.keaney@xxxxxx