Of fires & deficits
Randolph Buss, © copyright 2005
Berlin, Germany
One of the things about human psychology is the desire of wanting to fit in. It's not easy to go against the crowd or herd mentality. We like to feel cozy with our friends and colleagues and family. And so it goes with journalists and analysts and Dollar watchers. After President Bush came out and announced his grand plan to cut the US budget deficit to a "manageable" number, all the pundits fell down on their knees in amazement as though a holy entity had been seen on high or, in fact, the holy chalice itself had been found.
My response to all these budget cutting prophecies : Peanuts !
Now let me get this straight : What Bush said needed to be said. The Markets, big M, were getting very nervous about the US Dollar situation. Too much negativity was snowballing against the USD and thus needed to be dealt with. Talking the talk. Check. As I said, this talk promptly strengthened the USD and drove gold down. Oil is also down. USD is back up to 4 month highs against the Yen and Euro. Suddenly a tide of US positive news while just a month or two ago, one couldn't have pried such a statement out of anybody. My, my, how quick we are to forget. Remember, this is all just planning and talking by Bush, NOTHING has actually happened yet. Congress still has a big say in all this and so do the foreign investors, bond markets, etc. This whole story is now just beginning, not ending.
Walking the walk. Washington DC runs on politics and politics runs on money. Programs of every colour have their supporters and caterers. The cutting back or elimination of various programs or pork-barrel projects or "discretionary spending" or whatever will not stem the tide of the budget deficit. What this whole debate comes down to at the moment is the analogy of a raging forest fire (budget) and the fire-fighter (Bush) out there standing in shorts and donning a baseball cap while holding a garden hose and squirting out little fires at the edge. This will certainly give us all a nice feeling that something is trying to be done, but the end result will not change.
The "big dogs" of the deficit are home-grown issues like Medicare and Social Security. Large cutbacks in these programs and the farmers would be standing at the fence with pitchforks, blood thirsty. Such political mistakes he would not make. The other puzzle part is the incoming versus outgoing. The fact is, foreigners hold 80% of US debt. Without the incoming foreign funds, the outgoing exports would never cover the gap. The US hardly produces anything anymore. And the domestic savings rate is negligible or 1% at best. Hence, cutting some politically non-sensitive programs and leaving both the entitlement programs and defence budget is like well, taking the garden hose to the conflagration, or in other words, it's just peanuts as far as the real deficit is concerned.
What does this mean? Well, as long as the potential for a catastrophic failure of the USD is still a possibility, I suppose the talk will be ratcheted up but the walk will be lacking. IF the Fed continues to hike interest rates, a level might be reached which breaks the US consumer's back. What that level is nobody currently knows. But the risk is to US consumers both on their inflated asset holdings and their accumulated debt. Both of these being the main drivers of consumption. If consumption falls dramatically in the US, then the US GDP shrinks massively. That is untenable to a politician and would be the death knell to the USD and maybe even to the Asian exporters. The Asians have seen the writing on the wall, and are diversifying trade amongst themselves. Russian is trying to get Euro pegged roubles and not USD pegged roubles, on and on…
The biggest problem continues to be : How to avoid the pain of this imbalance to the US consumer and economy?
I honestly think the US budget deficits will increase until exhaustion. Why? I believe neither the US politicians nor the US people have the ability to take that pain. The medicine of fiscal tightening should have taken place directly after the 2000 bubble broke. It was avoided.
What the world would look like with a USD whose inherent value is zero I cannot fully imagine. I believe the next years will bring so much unforeseen happenings to the forefront that possibly historical data will play no major role in contemplating or predicting how financial markets should be functioning, after all, models of chaos are not the standard models by which institutions model. Nevertheless, nature does at time purge itself just as economic markets do. I feel we may be in the upsurge of that purge cycle.
More on this in upcoming issues - if you would like to know more, please sign up for a free subscription to Der Invest Informant here
Randolph Buss / Berlin, Germany
10 February 2005
editor@dinl.net
www.dinl.net
The Der Invest Informant www.dinl.net is a free newsletter. It deals with international issues of The Markets o Economic Outlook o Finance o TA & Charts o Politics o Life, Culture & Technology o Geopolitics o Security o Freedom.
If you would like to be on our MAILING LIST, please send an email to diiportal@dinl.net.
Place "free newsletter" in the Subject Line of your mail. Thank you.
Any remarks or comments - All feedback is gladly accepted (good, bad, indifferent). editor@dinl.net.
Disclosure and Disclaimer Statement: This document is intended for informational purposes only. DINL is not a registered financial advisor in the USA. Not advice or intended as advice. The author has not received any payment or reimbursement of any nature for writing this article. The author's objective in writing this article is to raise awareness within the reader and to further their understanding of international and/or monetary issues and to encourage their own further due diligence / research. Neither the information nor the opinions expressed should be construed as a solicitation to buy or sell any stock, currency or commodity. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions.
Further dissemination and publication of this document is legal but must contain the full title, date, editor's name and full email address. Otherwise please contact the editor for express written consent.
Printer Friendly Version
Email this Article
