You'll be happy to know that the Reflecting Pool, which stretches along the Mall below the Lincoln Memorial, is only about knee deep. It's also frozen solid today. The Fed Gov, Alan Greenspan, was in Berlin yesterday mumbling soothing words publicly just a week after his Washington DC neighbor, the IMF published a (well it's hard to call anything written in central bankese, scathing, as you will see below) a searing report, with the hot title, "U.S. Fiscal Policies and Priorities for Long-Run Sustainability", http:/www.imf.org/esternalPUbs/NFT/Op/227/index.html.
This bit of Cassandra coming out of the Mordor of anti-globalization was echoed the next day in Brussels by the head of the ECB, the European Central Bank. The new President of the ECB, a Frenchman who is known for his advocacy of a strong euro, Jean-Claude Trichet,perhaps with his hand twisted behind his back by a bunch of angry German manufacturers, was heard whispering something about not tolerating "brutal" currency movements. Everybody understood this to mean that even he thought the dollar was dipping a bit too fast.
But it now looks clear that while Alan was hobnobbing with his fellow bankers in Berlin, --or was it in Brussels?-- something else got whispered. At least, that's what the currency and gold markets believe. Brutal movements, there were, indeed, but in the opposite direction than the one Trichet was talking about. In the last couple of days the euro, which had peaked at $1.29 was trading at a little south of $1.26. Even more brutal was the move in the gold market. Just a week ago, gold moving in concert and even faster than the euro, had broken through a long-term high at over $430 to the troy ounce. Bam! Today it is trading in NY at $408.70.
Is this just overreaction on the part of traders who want to lock in their big gains or is something unseemly going on? Can we now expect to see the Europeans in the overnight markets buying up dollars to prop up the staggering greenback like their Japanese co-conspirators and are there nefarious forces planning to dump a big quantity of gold onto the market to squelch what might begin to look too much like a move back to hard money? All we can say, is that it's definitely time to keep your powder dry and your eye cocked. Folks who got into gold late, may get a second reprieve on the dip.
So what did the IMF say and was it just coincidental that it came out just a week before this flurry of activity? We, of course, have no flies on the wall at the Fed or in any of the other highly ornate ceilinged rooms that European bankers like to congregate in, so we can only wonder.
As for the IMF report: They might have dusted off one of their old papers on Malaysia or Argentina or one of those other places that fell apart in recent memories. There it was in black and white: The US is running deficits that are unsustainable. Government spending, what with the Iraq war and rebuilding effort, homeland security costs and the usual mix of entitlements, programs and pork has increased from 6 1/4 percent of GDP in 2001 to 7 1/4 percent by 2003 thus adding %25 percent to the deficit. An additional 25% of the deficit was the direct result of the tax cuts that have been voted in since Bush took office.
The IMF then turns its attention to the global implications, noting that the US is running unprecedented budget deficits at the same time it is running up record trade (current account in bank speak) foreign debt:
"Moreover, against the background of a record-high U.S. current account deficit and a ballooning U.S. net foreign liability position, the emergence of twin fiscal and current account deficits has given rise to renewed concern. The United States is on course to increase its net external liabilities to around 40 percent of GDP within the next few years—an unprecedented level of external debt for a large industrial country (IMF, 2003b). This trend is likely to continue to put pressure on the U.S. dollar, particularly because the current account deficit increasingly reflects low saving rather than high investment.
Although the dollar's adjustment could occur gradually over an extended period, the possible global risks of a disorderly exchange rate adjustment, especially to financial markets, cannot be ignored. Episodes of rapid dollar adjustments failed to inflict significant damage in the past, but with U.S. net external debt at record levels, an abrupt weakening of investor sentiments vis-à-vis the dollar could possibly lead to adverse consequences both domestically and abroad."
And so, what we have, says the IMF, is a country in debt up to its ears even before the big rush of retiring baby boomers goes to cash in their payroll tax levied social security and medical benefits, states fighting huge deficits, (typically but even more acutely in places like California where the voters will have to approve floating a $15 billion dollar bond bailout), family plastic debt (non-mortgage) the highest in history, stagnant wages,and a consumer-based economy that buys $1.5 billion more than it sells every day.
Meanwhile the stock markets boom and housing values continue to grow!
It's a strange balancing act that could be tipped over by a feather. So, maybe the rush to get the dollar down to $1.45 to the euro before the election was a little too fast and we're seeing the kind of legerdemain that only central bankers know how to pull off.
A cheap dollar and budget deficits, if not temporary, will begin to weigh heavily on the economy in the form of higher prices and interest rates. Karl Rove et al. are just praying that super Alan can keep a lid on it until after the elections. You can be sure we will stay tuned.
rmb
Copyright 2003 Richard Mendel-Black All Rights Reserved
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