Tony,

Is this the fault of the euro too? It just has to be! US deficits were never a problem before the euro. First the Europeans destroyed FFU with metric, now they are destroying the US dollar and economy(last supporter of FFU) with their euro.

http://www.washingtonpost.com/wp-dyn/content/article/2005/04/28/AR2005042801571.html


Day of Deficit Reckoning?

By David Ignatius

2005-04-29 Page A23

The British comedy troupe "Beyond The Fringe" had a skit years ago about a group of doomsayers who huddled together on a mountaintop to await the end of the world. They sang a final dirge and waited . . . and waited. Finally one of them broke the silence: "Same time tomorrow, lads. We must get a winner one day."

Economists must feel a bit like the perpetual doomsayers in the British comedy skit. They have been warning about global financial imbalances for months and in some cases for years. They have described serious risks for the United States if it doesn't reduce its budget and trade deficits. And the worriers aren't flakes: They include such famous names as Fed Chairman Alan Greenspan, former Fed chairman Paul Volcker and investor Warren Buffett.


But somehow the perpetual-motion machine of the U.S. economy has kept defying predictions. And gradually people may begin to think the economic laws of gravity really have been suspended. The situation reminds me of the Internet bubble of the late 1990s. Economists had been warning that the bubble was unsustainable -- that people wouldn't keep paying absurd prices for companies just because they had an Internet "business plan" -- and yet the Nasdaq kept rising. Ordinary folks began to wonder if the economists were all wet, and they rushed to buy their piece of the Internet dream. Whereupon the bubble burst.

Among politicians in Washington, the disregard for economic warnings is now almost universal. There's a political cost to facing reality -- namely, unpopular spending cuts and tax increases -- so most legislators continue to ignore it. Greenspan tried to sound a wake-up alarm last week, telling Congress: "The federal budget deficit is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years." But his comments roused little response.

Unlike the hapless doomsayers on the mountaintop, economists who are warning about a financial day of reckoning will in fact get a grim winner one day. The U.S. economy will slow, the dollar will fall, consumption in the United States will decline -- until the twin deficits begin to shrink and the global economy is rebalanced. That process of correction may already have begun while the politicians were off in Neverland: The Commerce Department reported yesterday that during the first three months of 2005, the U.S. economy grew at its slowest pace in two years, 3.1 percent, because of lower consumer and business spending, higher oil prices and the widening trade gap.

A sober forecast of what may lie ahead can be found in the annual World Economic Outlook published this month by the International Monetary Fund. Using a new model of the global economy, IMF economists simulated what would happen if China, Japan, South Korea and other Asian nations that have been financing the U.S. trade deficit joined the rest of the world in selling dollars. The model forecasts a steep fall in the dollar of 15 percent or more; an increase of nearly 1 percentage point in U.S. interest rates; and a fall in American economic output of 1.5 to 2 percentage points. And those changes are on top of the U.S. slowdown that would take place normally to rebalance the trade deficit, IMF chief economist Raghuram Rajan explains.

Translating the IMF simulations into consensus numbers about the real economy, what can we expect? If the Asians decide to sell some of their dollars, the U.S. currency is likely to decline by at least as much as it has over the past two years, down to $1.60 against the euro, or worse; the U.S. economy would slow toward zero growth or even a mild recession. And that's assuming that financial markets remain orderly.

The Bush administration's main response to the economic squeeze -- in addition to the president's racing around the country promoting an unpopular plan for private Social Security accounts -- has been to push the Chinese to revalue their currency upward. That would make Chinese exports to America more expensive and might thereby reduce the U.S. trade deficit. But as New York University economist Nouriel Roubini has noted, a 20 percent appreciation of the Chinese currency against the dollar would cost the Chinese a $100 billion loss on their dollar hoard, equal to about 7 percent of China's gross domestic product. Roubini and economist Brad Setser describe the situation as a "balance of financial terror." It's hardly the ideal environment for an orderly global rebalancing.

Economics is in part a confidence game: That's why bubbles last so long, and why they finally explode. The best tonic for the global economy, argues the IMF's Rajan in a recent speech, is a commitment by political leaders to sensible policies that will slowly but surely reduce the imbalances. Unfortunately, that's precisely the sort of responsible political leadership that has been missing in the United States.

davidignatius@washpost.com

I'm going to be a contrarian and say the main purpose of the liberal media is to write articles that criticize the current Republican administration. Therefore, whether real cause or not, they have to pick "reasons" they can tag the administration with.

The things they cite may be factors, but I don't think they are the main cause. I'm not an economist, but some things I think are having greater effect:

The high price of oil: It is causing people to defer the purchase of large SUVs and trucks, or buy small, foreign cars. I've seen claims the auto industry (when suppliers are counted) is as much as 20% of the US economy. Whether or not that figure is true, neither the economy nor the auto industry has ever done well when the other is in trouble, and they contribute heavily to each other's woes.

Job security: Mergers and offshoring of good manufacturing jobs has everyone worried about their job security including those current employed -- "Will I be next." I think consumer confidence is really much worse than polls reflect, and people are unwilling to sign up for big purchases unless they basically have no choice. The economy has been in the crapper since 2000-2001, it rallies a little, then some more bad news sends it back to the crapper. With no good jobs, consumers can't buy anything. The economy can't run on high pay to CEOs for shuffling paper around (and now, paper shuffling can be offshored too).

Cheap imports: (Monetary policy may be able to do something about this) Cheap imports are destroying American jobs that haven't been offshored. Rather than move factories offshore, companies just buy cheap goods offshore and distribute them here, turning from manufacturing companies into traders.

All of those contribute to the deficit so you can establish data correlation, but as a root cause, I believe the deficit is overrated. If oil prices had not increased so alarmingly, the Bush tax cuts might have gotten the economy back on track, even though they add to the deficit. The economy was starting to rally nicely, but oil has absolutely tanked it.

"""I'm going to be a contrarian and say the main purpose of the liberal media is to write articles that criticize the current Republican administration. Therefore, whether real cause or not, they have to pick "reasons" they can tag the administration with.""""


I'm not one to divide the media into liberal vs conservative, but one who looks for information no matter what its source. Either side can produce valuable information. Of course one has to strip away the emotion to get to the meat of the article.


"""The things they cite may be factors, but I don't think they are the main cause. I'm not an economist, but some things I think are having greater effect:"""


I agree with you, they are only factors. The root cause is the maintaining of the petro-dollar system. Whatever it takes to keep this debase economic system funded is the root cause of the present economic debacle and the deficits are a measure of how deep the hole is. Did you read the articles to understand how the petro-dollar system works and why the US will do everything it can to protect it?


"""The high price of oil: It is causing people to defer the purchase of large SUVs and trucks, or buy small, foreign cars. I've seen claims the auto industry (when suppliers are counted) is as much as 20% of the US economy. Whether or not that figure is true, neither the economy nor the auto industry has ever done well when the other is in trouble, and they contribute heavily to each other's woes.

Job security: Mergers and offshoring of good manufacturing jobs has everyone worried about their job security including those current employed -- "Will I be next." I think consumer confidence is really much worse than polls reflect, and people are unwilling to sign up for big purchases unless they basically have no choice. The economy has been in the crapper since 2000-2001, it rallies a little, then some more bad news sends it back to the crapper. With no good jobs, consumers can't buy anything. The economy can't run on high pay to CEOs for shuffling paper around (and now, paper shuffling can be offshored too).

Cheap imports: (Monetary policy may be able to do something about this) Cheap imports are destroying American jobs that haven't been offshored. Rather than move factories offshore, companies just buy cheap goods offshore and distribute them here, turning from manufacturing companies into traders.

All of those contribute to the deficit so you can establish data correlation, but as a root cause, I believe the deficit is overrated. If oil prices had not increased so alarmingly, the Bush tax cuts might have gotten the economy back on track, even though they add to the deficit. The economy was starting to rally nicely, but oil has absolutely tanked it."""


As mentioned before in the other thread, all of these are a necessary component in maintaining the dollar hegemony (petro-dollar) system. The high cost of oil is especially desireable. It means more dollars are needed to buy oil, thus more are needed to be printed and thus more (hopefully) will be recycled back into the US economy to fund more of the economy in the present and future.

The creation of low pay no benefit jobs is not meant to destroy the American middle class as the middle class is given unlimited credit to draw from. You aren't expected to worry about paying the credit back, just keep spending it. You are expected to spend, spend spend the economy into growth by continuing to buy, buy, buy. Your bank isn't really worried about you not paying the loans back, as they don't hold on to them. They sell them off to international investors who are the ones who will be the big losers when the system goes belly up.

The government tax break was a joke. They are able to do it because they can just float more bonds to obtain the operating money they need. In reality they could just stop collecting taxes all together and sell bonds for all their needs. Then you would have a lot more spending money to buy the economy back into health (yah! right!). That would be like me writing a cheque from a bank account that was empty to pay for everything I want, and then running my household on rubber cheques I receive for my services. Can you imagine that working for long?

The reality is, the present petro-dollar system is starting to crumble. What we are experiencing now are the pre-shocks. When it really does pop, run for cover because the explosion is going to be a big one. Maybe as big as the big bang.

Who needs nitol when you can print all this out and take it to bed with you to read?

Darn, he's back! That for sure was ashort trip!

pay me if you wish to worship me

I wouldn't give you one eurocent.

EARN IT FIRST

(btw, we don't call them "eurocents" in Europe)

"WE"? So you do use them. I know they are just called cents, but I wanted to make sure you understood the euro part and not mistook it for "cents" used with other currencies.

The best name would be the centieuro (c€).

Except they don't call them that.

This is a bit like the "Records are metric" argument.

But not as hilarious.