Sunday, January 23, 2005

Leader of the Expensive World?

Uh oh. Eyes are beginning to shift; carefully scanning the area for any other kind of subject matter to focus the attention on.

That's right folks - we're going to talk politics.

I can see the mental version of the tea-cozy slipping over a few brains already. Well, guess what?


How, you may ask?

It's quite simple - the US economy is near breaking point.

"Oh God NO! Not the Economy too! What did I do to deserve getting cornered by this guy? Can't he see that I'm just trying to finish my hotdog in peace?"

Well, wakey-wakey Sunshine, because that hotdog is going to cost a hell of a lot more in the future, especially now that George W. Bush has been inaugurated for his second term as US President.

To be perfectly honest with you, I'm not a fan. Call me crazy; call me a lefty liberal; call me whatever the hell you want, but there's something about that guy that strikes me as just plain dodgy.

Is it the endless lies?
Is it the whole Middle-East invasion?
Is it his religious fundamentalism?
Perhaps it's his past history of drug abuse and alcoholism?
Or is it just his grotesque butchering of the English language?

Maybe all of the above?

In any case, he is currently accountable for the US economy, which is disappearing down the toilet. Recent comments by Stephen Roach, chief economist for Morgan Stanley, are grim indeed on the subject.

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.

Wha..? 85%?!?
This means that only 15% of the US economy is actually made up of stuff. You know, manufactured goods - real commodities or products that people want to buy. The rest is the population taking out loans from banks to purchase said stuff. The problem is, the stuff most people in the US are buying is made in other countries (mostly in China and other East-Asian countries). Another problem is that the US is not paying for these goods in the currencies of said nations - it pays for them in US dollars. It can do this because the US dollar is the de facto world reserve currency, and thus other nations are happy to sit on piles of it in their own central banks because it is always presumed to be worth something.

Not a bad scam, eh? If your money is presumed valuable by others, then you can just print as much of it as you want and effectively get goods and services for free. Of course, no scam lasts forever. If world confidence in the US dollar should drop, trading partners will stop accepting payment in US dollars. Investors will stop purchasing US Treasury debt paper (Bonds, currency etc).

Could such a thing happen? The initial signs seem to suggest it. Business Week suggests a few key factors to watch.

"Rubbish", I hear you say. "If Bush and the big guns in the Treasury can see this, then they'd do something about it".

Well, according to an article in the New York Times, Bush plans to reduce the Federal deficit by half by 2009. In the meantime however, the deficit is expected to rise in order to help fund the continuing war in Iraq. Sounds like he's saying, "Things will get better - just bear with us a bit longer".

Do you believe him? That's up to you. Personally, I'd recommend you start saving a bit of extra cash now if you still want a few extra hotdogs at your future BBQs...


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