Another in my "doom & gloom" series, but without a such a doom ending. This one is dedicated to Brian for getting me back to basics. If macroeconomics is boring to you - delete now or you risk injury when your head hits the keyboad.
Abridged from: Apr 6th 2005 The Economist Global Agenda AMERICA has been warned many times in recent years that its profligate spending is dangerous, for itself and for the world economy. So far, however, Americans have ignored such doom-mongering, gleefully driving their current-account and budget deficits to record levels. Now the World Bank and the International Monetary Fund (IMF) seem to be trying to stage an intervention. This week, both have come out with reports on the global financial situation�and both reports give warning that America's fiscal irresponsibility poses serious risks to the world economy. Part of the reason this spending is so hard to get a grip on is that it is happening on multiple levels. With interest rates low, consumers have been tapping into their home equity and taking on credit-card debt�the latest figures from America's Bureau of Economic Analysis show individuals' savings were just 0.6% of their income in February. Meanwhile, even after massive tax cuts, the Bush administration has forged ahead with ambitious spending programmes. Thus, in 2004 the federal government's budget deficit hit $412 billion, a worrying 3.6% of GDP. It is projected to fall only to $365 billion, or 3% of GDP, in 2005. The natural adjustment mechanism for America's rapidly growing foreign liabilities would be a declining dollar, which would lower demand for imports and make America's exports more attractive on foreign markets. But the Asian central banks are stalling this process because they want to keep their currencies from appreciating against the dollar and thus becoming less competitive�and buying sackloads of dollars and then dumping them into US Treasuries achieves just that. This simply enables America to borrow more, making the inevitable adjustment sharper when it comes. That risk, of course, makes dollar-denominated assets less attractive, meaning that the Asian central banks have to go to ever-greater lengths to keep their currencies from appreciating. [Growth in 2004, however,] was robust, and the world is currently enjoying high levels of macroeconomic stability. Alan Greenspan is expected to deliver steady increases in interest rates, slowing American demand, and forcing its consumers to rebuild shaky savings; it is hoped that this will help bring about an orderly adjustment in the dollar's value. The resulting decline in imports should allow central banks to cut back on the breakneck pace of growth in reserves. And who knows? Perhaps once ordinary Americans are forced to live within their means, they will start demanding the same from their government. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~| Discover CFTicket - The leading ColdFusion Help Desk and Trouble Ticket application http://www.houseoffusion.com/banners/view.cfm?bannerid=48 Message: http://www.houseoffusion.com/lists.cfm/link=i:5:153446 Archives: http://www.houseoffusion.com/cf_lists/threads.cfm/5 Subscription: http://www.houseoffusion.com/lists.cfm/link=s:5 Unsubscribe: http://www.houseoffusion.com/cf_lists/unsubscribe.cfm?user=11502.10531.5 Donations & Support: http://www.houseoffusion.com/tiny.cfm/54
