komentator
21.02.03, 22:09
Ponizsza analize krazaca dzisiaj w kolach finansowych w Nowym Yorku ale
zatajana przez urzedowy optymizm dedykujemy yankesom dla przetarcia oczu:
There’s no Limit for a Nation in Debt
Ernest Hemingway wrote, "The first panacea for a mismanaged nation is
inflation of the currency; the second is war. Both bring a temporary
prosperity; both bring a permanent ruin. But both are the refuge of
political and economic opportunists."
Twin deficits are clearly here to stay after the trade gap widened to a new
record $44 billion in December and US Treasury Secretary Snow asked for the
debt ceiling to again be raised. Optimists would say that today’s trade
deficit only shows that the willingness of foreigners to exchange $1.5
billion of their goods each day for our paper assets is a positive
reflection on our capital markets. But with the US already running an
external deficit nearing of 5% of GDP, it becomes obvious that the US dollar
has not yet weakened enough to bring the rising deficit in line.
Indeed, US imports rose to $125 billion, which indicates that the Fed’s
attempt to inject more liquidity into the system has not only fueled a
housing boom, but that consumers have used the easy credit to buy more
foreign goods, while liquidity has also worked its way into real goods
prices as seen by the 6-year highs on the CRB index. Clearly this is not
what the Fed intended, nor does it bode well for the US economy. Moreover,
it harkens back to the embarrassing moment when President Bush was speaking
to small business owners with a backdrop that read “Made in America,” only
to be later revealed that the boxes instead were stamped “Made in China.”
While the dollar shed half a cent against the euro today, it is important to
remember that both US equities and the greenback are benefiting from a near
term change in momentum now putting some wind at their backs. Nonetheless,
over the longer-term the dollar will remain vulnerable to further pressure
due to the rising twin deficits.
Moreover, it raises the uneasy question as to what happens when foreigners
who hold around 40% of US Treasuries begin to sell their vast holdings once
interest rates rise? Optimists would say there is no need to panic because
U.S. Treasury securities are considered the safest investment in the world
and the government has always met its obligations.
While that may still hold to be true, on Wednesday, Treasury Secretary John
Snow informed leaders of Congress that the government would today reach the
$6.4 trillion borrowing limit. In a signed letter to Congress, Snow
wrote, “I know that you share the President’s and my commitment to
maintaining the full faith and credit of the U.S. government, especially at
this critical time. Together we must continue working to enact an increase
in the statutory debt limit as quickly as possible to avoid any negative
repercussions at home or abroad.” In the meantime the Bush administration
will begin to borrow from its government pension fund. Ironically, a similar
account has been used this year to subsidize cash strapped corporations
whose pension obligations are under funded.
With an administration intent on having both its war and tax cuts, last
year’s fight over raising the debt ceiling from $5.95 trillion to the
current limit of $6.4 trillion may seem inconsequential. In fact, in last
week’s testimony, Mr. Greenspan even suggested that Congress should consider
doing away with the debt limit, since Congress has never been able to
constrain spending. But he warned, “We are all too aware that government
spending and tax preferences can be easy to initiate or expand but
extraordinarily difficult to trim or shut down."
This was not cryptic Greenspan rhetoric. This was a clear signal to Congress
that the Maestro sees the writing on the wall and would encourage others to
do the same. The irony is that the Bush administration has asked for a
higher debt limit in order to protect the country's excellent credit rating.
Unfortunately, it may not protect from rising interest rates.
That’s because public and private debt stands at a staggering $32 trillion,
or three times GDP. Therefore, a large increase in borrowing by the
government may prove to be harmful to a nation still struggling under a debt
hangover from the 1990's bubble. A back of the envelope calculation shows
that at 5% annual interest rate, it costs $1.6 trillion a year to service
this debt. Regardless what optimists would say, increasing the nation’s debt
burden from this point is unsustainable.
Furthermore, with Treasury yields already at unsustainable lows, ballooning
twin deficits are likely to pop the bond bubble, thereby sending interest
rates higher this year and reign in the housing market. Ultimately, this
would send the dollar into a tailspin as some foreigners would sell back
their bonds.
This may seem a dire prediction but given that Fed-flationary efforts to
stimulate the economy have failed to serve their intended purpose, current
calls for more stimulus and tax cuts will only serve to raise long-term
interest rates. So far, Fed-flation has failed to revive the ailing equity
markets and while paper asset prices continue to fall, the increased money
supply has found its way into real goods, thereby increasing the cost of
living. The situation is exacerbated by the fact that U.S., total household
debt is at a record levels, not seen since the 1930s.
