Thursday, September 27, 2007
some of my recent thoughts on the subject:
Business Times - 28 Sep 2007
US may have to bid farewell to good times
The house of cards is falling amid soaring oil prices, diving home sector and credit crunch
IT will be recalled as a Golden Economic Age, the Greenspan Era, or the Goldilocks Economy - but one thing is clear: The good days of doing-away-with-the-business-cycle and spending-like-there-is-no-tomorrow are probably over as far as the US economy is concerned.
Indeed, it is becoming obvious that Americans will have to say 'bye, bye' to an age when consumers could take out huge mortgage loans to pay for new homes and spend the weekends shopping for the latest plasma televisions - made in China - as they maxed out on their credit cards.
The era when financial institutions could juggle new and increasingly complex ('exotic') financial products that made it possible to extend more credit to the consumers and businesses, including packages of mortgages to those who had already maxed out on all their credit cards, are well and truly over.
And the time when the government could expand its current account deficit (6.2 per cent of US GDP in 2006) on military adventures in Mesopotamia and on tax breaks for financial speculators and real estate magnates - and have all of that financed by China - has gone.
And, yes, it's also an end to the years during which the US Federal Reserve Board could print more money to ensure that the good times of low interest rates, low prices, and cheap money will continue to roll.
For much of the post-Cold War era and the ensuing years of globalisation, with the former members of the communist bloc, China and other emerging markets joining the global economy, Americans benefited from the rewards of economic liberalisation abroad and at home.
Hence, global trade liberalisation, including the creation of the World Trade Organization (WTO) and the accession of China and other new economies into it, made it possible for American consumers to spend more time in shopping malls buying very cheap Made-in-China socks and shoes, televisions and computers, and a lot of toys.
In turn, the Chinese - as well as the South Koreans and Japanese - used up the money they made exporting their cheap products to the United States to purchase US treasury bills and stakes in American companies and help the US to run its huge current account deficit and maintain its low real interest rates.
While the Chinese were saving and the Americans were spending, the de-regulation of the American economy, including its banks and other financial institutions in the 1990s, made it possible for whiz-kids in the hedge funds to come up with all the various exotic financial instruments that made it possible to provide more credit to American consumers and businesses.
US financial institutions stoked up a real estate boom that provided cheap mortgages to American buyers who could then commute from their new homes in the 'exurbs' to their work in cheap SUVs and who could fill their cars with cheap gas, thanks to the low global energy prices, made possible by Saudi Arabia and other oil-producing states that the American military helped protect.
The process of globalisation combined with the high-tech boom of the 1990s, including the above-mentioned new financial products together with the intervention by Alan Greenspan's Fed in the form of pumping money during financial crises, helped protect the American economy against potential shocks and created expectations that it was possible to moderate the business cycle for eternity.
And it all sounded like a good deal. This American Empire of Debt made life good for most Americans. It enriched the money men and women and the members of the emerging class of globe-trotting yuppies while making it possible for the members of the middle class to finance their shopping for televisions, home buying and vehicle driving.
The bursting of the high-tech bubble, the bearish mood on Wall Street and the terrorist attacks on Sept 11, 2001, created the sense that the economic chickens were coming home to roost. But the Fed's intervention in the form of rate cuts helped keep the economy going with just a mild recession.
It also lifted spirits in Wall Street as low interest rates kept the credit bubble afloat even as energy prices were going up - as a result of the booming Chinese economy and the instability in the Middle East - while the US budget and trade deficit were expanding - thanks to the military intervention in the Middle East and the growing imports from China.
It was not surprising that with falling interest rates and low inflation, Americans felt that despite recession and war, they were getting richer.
But the combination of high energy prices, a collapsing housing market and a credit crunch have finally brought down the house of cards in the form of falling home prices, collapsing mortgage firms and anxious financial markets.
Even if the recent rate cuts by Ben Bernanke's Fed helps lessen the turmoil in the markets, it is becoming clear that the mood among American consumers and businesses is changing as the economy is getting ready for a major slowdown.
There are no signs that the housing market is recovering or that borrowing costs will stop rising. And there are growing fears that the rate cuts could actually backfire, by igniting inflation pressures and by putting downward pressure on the US dollar that has already been sliding against the euro and other major currencies in the last six years.
While some investors will probably take advantage of new investment vehicles to exploit the decline in the value of the US currency, and American exporters will benefit from a weak US dollar in selling their products abroad, the falling dollar is probably the most dramatic sign of a weakening American economy.
A weak US currency would put upward pressure on prices in the United States and increase the risk of inflation. Most worrying is the possibility that foreigners, including the Chinese, will be less inclined to buy and even keep their dollar reserves which - as you recall - helped finance the American borrowing and spending, and by extension the US current deficit and allowed the good times to roll.
Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.
Business Times - 25 Sep 2007
US economy's latest ditty: The worst is yet to come?
By LEON HADAR
IT'S not clear whether the cheerful investors on Wall Street who were celebrating last Tuesday's decision by the Federal Reserve Board's monetary policy committee to slash federal funds rates by half a percentage point were paying much attention to Thursday's Congressional testimony by the US Federal Reserve chairman Ben Bernanke when he seemed to be warning that sub-prime defaults could actually surge in coming months.
But the financial markets as well as US President George Bush were in such a great mood - 'I'm optimistic about our economy. Inflation is down, job markets are steady and strong,' said Mr Bush - that the continuing credit crunch, rising energy prices and a decline in some key economic indicators were having no effect on exuberant investors who pushed the Dow Jones Industrials Average and the broader S&P index to new highs.
Yes, just like in the good old days of former Fed Chairman Alan Greenspan. Mr Greenspan incidentally was appearing on numerous television news shows and book parties trying to sell his memoirs The Age of Turbulence as his successor was addressing lawmakers on Capitol Hill where he promised to use the Fed's regulatory powers 'to address potentially deceptive mortgage loan advertisements and to require lenders to provide mortgage disclosures more quickly'.
During his congressional testimony two days after reducing the federal funds rate from 5.25 per cent to 4.75 per cent, Mr Bernanke reiterated that the Fed's main goal - cutting rates was not to bail out reckless investors but to contain the threat of an economic recession that seemed evident after new data indicated that US employment had declined in August.
'The turbulence originated in concerns about sub-prime mortgages, but the resulting global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans,' Mr Bernanke explained to the lawmakers, using dry economic jargon to highlight the potential for an economic crash that could have resulted from the crisis in the housing market and the ensuing credit crunch.
Of course, it would be difficult to show that the Fed's interest cuts last week ended up averting a wider economic crisis. But no one doubts that if anxiety returns to the financial markets in the coming week, critics will blame Mr Bernanke for providing incentives to irresponsible investors to take more risks - the so-called 'moral hazard' problem. And if inflation rears its ugly head soon, the dramatic cut in rates by the Fed will be held responsible for the mess.
In addition to rising oil prices and labour costs, inflation hawks who had opposed the rate cuts are also pointing to the rise in long-term interest rates and in the value of gold, two important indicators of inflation.
At the same time, they argue that there are no signs of an economic recession in the retail and manufacturing sectors and that the earlier warnings about unemployment were overblown.
Moreover, lower rates have helped to push down the US dollar against other major currencies, including the euro, which is, in turn, making imports more expensive and increases pricing pressures and inflation pressures.
At the same time, the fall in the value of the US dollar is also helping to increase US exports which is clearly good news for the American economy by helping the growth of many US industries and creating conditions for a reduction in the huge trade deficit.
From that perspective, the rate cut could prove to be just the kind of stimulus that a somewhat soft US economy needed. But fears of inflation cannot be discounted, especially when one takes into consideration that the rate cuts by Mr Greenspan's Fed were made at a time when the globalisation process helped counter the inflationary pressures of those rate cuts.
That is not the case today. This makes the rate cut by Mr Bernanke's Fed more risky. And when it comes to some of the most serious structural problems facing the US economy - the massive current-account deficit and the accumulating debt by households and businesses - the prospect of Mr Bernanke showering cheap money on the American economy - is certainly not going to help.
It could make things worse by encouraging financial institutions to come up with new ways to extend credit, take more new risks and ignite new financial crises.
Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.