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Saturday, February 26, 2005

United States Deficits Risk Crash 

What is ironic in the Australian discussion of the "American bubble economy" is that the Australian Treasury, which Dr Henry heads at the public-service level, has followed United States economic and financial policies faithfully and uncritically - we can, fairly, say slavishly - for the past thirty years.
Australia has a trade and payments deficit of much the same relative magnitude as the United States. At the moment, I think it is running at the rate of about $20 billion to $30 billion a year. The US population is about 15 times the Australian. In terms of relative population, level of trade and GNP, there is not much to choose between them. (Australia does have - or at last advice, did have - a budget surplus. This too deserves discussion. The surplus seems to have been achieved through neglect of public investment and the environment, wholesale privatisation and misconceived tax and welfare policies. That surplus - and the United States budget deficit - deserve examination, separately from the trade and payments deficit, although in large measure they spring from the same fundamental economic and financial policies.)

The trade and payments imbalance of both the United States and Australia is chronic. It is buried deep in the policies adopted since the breakdown in postwar stability and the collapse of the IMF in the period from 1969-71. The monetary and fiscal policies adopted then and persisted in right up to the present day, gave us stagflation and then shifted inflation from domestic price rises to external deficits. Inflation has never "gone away." The United States and Australia are still consuming more than they are producing and the result, instead of showing up at the check-out of Wal-Mart or Woolworths, shows up in the monthly statistic of the trade and payments imbalance.
Those policies created the Asian Tigers. Foremost among the Asian Tigers is now China which is developing at astonishing speed to become, it seems, not only the economic rival of the United States, but potentially also the strategic rival. The United States gutted its manufacturing industry and is now in process of gutting much of its service industry as well. Its most lively industries are the middlemen between the manufacturers overseas - in China, India, the other Tigers - and the consumers in the United States. Wal-Mart is in many ways the symbol of the draining away of American power.
What about Australia?
Australia is much smaller. It is not a superpower. Its currency is not a reserve currency like the United States dollar. The world does not focus on Australia to learn what is good or bad, what is good sense and what is error, in the same way as it does on the United States. But Australia has gutted its industry too - its manufacturing industry and, indeed, is beginning to gut some of its service industry too. It is being reduced back to the level of dependence on primary exports - from mine and farm - that it endured decades ago. The diversification that it achieved, especially in the period from 1945 to 1970, has been thrown away. If we had adopted sensible economic and financial policies, way back in 1969 and in the years afterwards, we could have been a Tiger too. Instead, we modelled ourselves on the United States and the result has been that we have not been, and are not now a Tiger, but, like the United States, a "victim" of the Tigers.
The reversion of Australia to a "mine-and-farm economy" is confirmed by Dr Henry's statement that "This (financial crash in the United States) would hit US economic growth and, as a result, cut Chinese exports of manufactured products to the American market. In turn, this would threaten the boom in Australian mineral exports to China. "

Much of this has been caused by the breakdown of the IMF system for currency stability in 1971. Although the IMF survived as an institution, its character changed fundamentally. Instead of stabilising exchange rates, so that trade could be conducted on a predictable, non-discriminatory currency basis, the IMF - reflecting United States policy - presided over free-floating exchange rates which, on the one hand, gave an enormous impetus to currency speculation and, on the other hand, shifted trade protection and manipulation from the mechanism of the GATT and the present WTO, to the much more "flexible" devices of currency movements.When we think of movement in the United States dollar, we can now think in terms of trade protection of 50% or more. As an example, in relation to the United States dollar, the Australian dollar has moved from about 50 cents a couple of years ago to about 80 cents today. So the change has been of the order of 60%. The United States has been given protection in the Australian market to a consequent extent.
This makes nonsense of "free trade", "free trade areas" and the like, unless there is a common currency or, in the case of the China-United States link, a currency peg. The free-trade agreement negotiated between Australia and the United States becomes meaningless, except as a political gimmick, just as trade regulation by the WTO, in terms of tariff management, becomes illusory.
In these circumstances, where do we go if we are to achieve (1) stability in terms of economic growth, trade and payments; or, catastrophically, (2) chaos in these areas, leading almost certainly to strategic uncertainty, political division and enhanced risk of regional or more general armed conflict.
(1) The first step has to be a realistic appraisal of our present, mainstream economic and financial policies, especially those which have been espoused by the United States and embraced by such countries as Australia.
(2) The next step must be to devise policies of stability and growth to replace those in (1) above which have served us so badly during the past three decades. These new policies must be FUNDAMENTALLY new - as new as the Keynesian policies adopted after World War Two, contrasted with the policies that gave us persistent depression in the 1930s.
(3) The third and vital step must be to apply these new policies so as both (i) to meet the "short-term" crisis deriving from the mistaken policies of the developed countries, especially the United States; and (ii) to meet the chronic crisis of poverty and underdevelopment in the more neglected countries and regions, especially in Africa. This dual purpose can be served, but it calls for a major exercise of will by our policital and economic-policy leaders, especially those in certain key developed and developing countries.
It will NOT be enough to allow the present situation to drift and, for example, to live in hope that a further market depreciation of the US dollar will provide us with a safe and sufficient solution.
James Cumes
____________________________________
"Uncle Rupert is beautifully narrated, with a wonderful sense of warmth and detail". Order your copy at -http://www.magellanbooks.com/jamescumes.htmlhttp://www.authorsden.com/jameswcumes

US deficits risk crash:
TreasuryDavid Uren and Roy EcclestonFebruary 25, 2005 http://www.theaustralian.news.com.au/common/story_page/0,5744,12364202%255E601,00.html http://www.theaustralian.news.com.au/common/story_page/0,5744,12364202%5E601,00.html

PETER Costello's closest adviser fears the US is heading for a devastating financial crash that could ravage Australia's economic growth.As the Reserve Bank considers raising interest rates at its board meeting next Tuesday, Treasury Secretary Ken Henry likened the flood of money pouring into the US to support its budget and current account deficits to the stockmarket's dotcom bubble of the late 1990s. Were it suddenly to stop, there would be shockwaves felt throughout the world's economies. The financial crash feared by Dr Henry would involve a sharp fall in the US dollar and a bond market sell-off, which would push up US and world interest rates. This would hit US economic growth and, as a result, cut Chinese exports of manufactured products to the American market. In turn, this would threaten the boom in Australian mineral exports to China. Fears that the world economy is in grave danger are growing in the major financial capitals. The International Monetary Fund, which is responsible for stability of the world economy, also warned yesterday of a sudden collapse. IMF managing director Rodrigo de Rato said urgent combined international action was required to head off the dangers. The main cause of concern is the fact the US is running a trade deficit of about $US600billion ($760billion) and a budget deficit of about $US430billion for 2005. US imports are almost 50per cent greater than the country's exports, with the deficit being financed by international central banks and funds managers. Despite signs that the deficit is getting bigger, money is pouring into the US from Asia and Europe at such a rate that the US has been able to keep its long-term interest rates steady at 4.2 per cent since the middle of last year. Dr Henry said the flood of money was "worryingly reminiscent of Federal Reserve chairman Alan Greenspan's warning in 1996 of irrational exuberance in US stocks". He said that, as with the dotcom bubble in the 1990s, one could not tell how long it would keep going, but it would burst eventually. Dr Henry's comments, made to a meeting of Asian treasurers in Sydney yesterday, reveal that Treasury is much more worried about the health of the world economy than is the Reserve Bank. Reserve Bank governor Ian Macfarlane said last week that he did not think the US current account deficit was a serious threat. "I suspect the rest of the world will continue to finance the US current account deficit," he said. But if it did not, all that would happen would be a fall in the US dollar, which would not have serious consequences. The Reserve Bank expects world economic growth to slow only slightly from last year, when it recorded the fastest growth in almost 30 years. The different views about the economic risks may be aired at the Reserve Bank meeting on Tuesday. Dr Henry sits on the Reserve Bank board. The bank does think there are risks of financial collapse in the US, but believes it would be caused by the complexity of new financial products. The IMF also thinks economic growth will remain firm over the year ahead, but Mr de Rato says there are "serious threats and challenges ahead". Mr de Rato warned that it was highly unlikely that the US would continue to have access to "easy credit", based on its present economic policies. Mr de Rato said the fall in the value of the dollar should act as a "timely wake-up" to policy makers around the world to tackle the imbalances in the world economy. Mr de Rato said these included not only the US's deficits, but also resistance to economic reforms in Europe and Japan, as well as China's fixed exchange rate. Dr Henry said the problems went beyond the American deficits, which he said were mirrored by excessive surpluses in Asia. He said Asian countries were not allowing their domestic economies to grow fast enough, and were relying too much on exports. This put them at risk in any world economic downturn. The boom in investment in American financial markets could be brought to a halt by a number of developments, Dr Henry said. A slowdown in American growth could lead international private investors to pull out of the country. Foreign central banks, which have been buying long-term American government bonds, are already facing big losses as a result of the fall in the value of the greenback. "What if they change their mind?" Dr Henry asked. He said it was imperative that the Americans take action to reduce their budget deficit, while they should allow the value of the US dollar to fall further.

United States Deficits Risk Crash 

What is ironic in the Australian discussion of the "American bubble economy" is that the Australian Treasury, which Dr Henry heads at the public-service level, has followed United States economic and financial policies faithfully and uncritically - we can, fairly, say slavishly - for the past thirty years.
Australia has a trade and payments deficit of much the same relative magnitude as the United States. At the moment, I think it is running at the rate of about $20 billion to $30 billion a year. The US population is about 15 times the Australian. In terms of relative population, level of trade and GNP, there is not much to choose between them. (Australia does have - or at last advice, did have - a budget surplus. This too deserves discussion. The surplus seems to have been achieved through neglect of public investment and the environment, wholesale privatisation and misconceived tax and welfare policies. That surplus - and the United States budget deficit - deserve examination, separately from the trade and payments deficit, although in large measure they spring from the same fundamental economic and financial policies.)

The trade and payments imbalance of both the United States and Australia is chronic. It is buried deep in the policies adopted since the breakdown in postwar stability and the collapse of the IMF in the period from 1969-71. The monetary and fiscal policies adopted then and persisted in right up to the present day, gave us stagflation and then shifted inflation from domestic price rises to external deficits. Inflation has never "gone away." The United States and Australia are still consuming more than they are producing and the result, instead of showing up at the check-out of Wal-Mart or Woolworths, shows up in the monthly statistic of the trade and payments imbalance.
Those policies created the Asian Tigers. Foremost among the Asian Tigers is now China which is developing at astonishing speed to become, it seems, not only the economic rival of the United States, but potentially also the strategic rival. The United States gutted its manufacturing industry and is now in process of gutting much of its service industry as well. Its most lively industries are the middlemen between the manufacturers overseas - in China, India, the other Tigers - and the consumers in the United States. Wal-Mart is in many ways the symbol of the draining away of American power.
What about Australia?
Australia is much smaller. It is not a superpower. Its currency is not a reserve currency like the United States dollar. The world does not focus on Australia to learn what is good or bad, what is good sense and what is error, in the same way as it does on the United States. But Australia has gutted its industry too - its manufacturing industry and, indeed, is beginning to gut some of its service industry too. It is being reduced back to the level of dependence on primary exports - from mine and farm - that it endured decades ago. The diversification that it achieved, especially in the period from 1945 to 1970, has been thrown away. If we had adopted sensible economic and financial policies, way back in 1969 and in the years afterwards, we could have been a Tiger too. Instead, we modelled ourselves on the United States and the result has been that we have not been, and are not now a Tiger, but, like the United States, a "victim" of the Tigers.
The reversion of Australia to a "mine-and-farm economy" is confirmed by Dr Henry's statement that "This (financial crash in the United States) would hit US economic growth and, as a result, cut Chinese exports of manufactured products to the American market. In turn, this would threaten the boom in Australian mineral exports to China. "

Much of this has been caused by the breakdown of the IMF system for currency stability in 1971. Although the IMF survived as an institution, its character changed fundamentally. Instead of stabilising exchange rates, so that trade could be conducted on a predictable, non-discriminatory currency basis, the IMF - reflecting United States policy - presided over free-floating exchange rates which, on the one hand, gave an enormous impetus to currency speculation and, on the other hand, shifted trade protection and manipulation from the mechanism of the GATT and the present WTO, to the much more "flexible" devices of currency movements.When we think of movement in the United States dollar, we can now think in terms of trade protection of 50% or more. As an example, in relation to the United States dollar, the Australian dollar has moved from about 50 cents a couple of years ago to about 80 cents today. So the change has been of the order of 60%. The United States has been given protection in the Australian market to a consequent extent.
This makes nonsense of "free trade", "free trade areas" and the like, unless there is a common currency or, in the case of the China-United States link, a currency peg. The free-trade agreement negotiated between Australia and the United States becomes meaningless, except as a political gimmick, just as trade regulation by the WTO, in terms of tariff management, becomes illusory.
In these circumstances, where do we go if we are to achieve (1) stability in terms of economic growth, trade and payments; or, catastrophically, (2) chaos in these areas, leading almost certainly to strategic uncertainty, political division and enhanced risk of regional or more general armed conflict.
(1) The first step has to be a realistic appraisal of our present, mainstream economic and financial policies, especially those which have been espoused by the United States and embraced by such countries as Australia.
(2) The next step must be to devise policies of stability and growth to replace those in (1) above which have served us so badly during the past three decades. These new policies must be FUNDAMENTALLY new - as new as the Keynesian policies adopted after World War Two, contrasted with the policies that gave us persistent depression in the 1930s.
(3) The third and vital step must be to apply these new policies so as both (i) to meet the "short-term" crisis deriving from the mistaken policies of the developed countries, especially the United States; and (ii) to meet the chronic crisis of poverty and underdevelopment in the more neglected countries and regions, especially in Africa. This dual purpose can be served, but it calls for a major exercise of will by our policital and economic-policy leaders, especially those in certain key developed and developing countries.
It will NOT be enough to allow the present situation to drift and, for example, to live in hope that a further market depreciation of the US dollar will provide us with a safe and sufficient solution.
James Cumes
____________________________________
"Uncle Rupert is beautifully narrated, with a wonderful sense of warmth and detail". Order your copy at -http://www.magellanbooks.com/jamescumes.htmlhttp://www.authorsden.com/jameswcumes

US deficits risk crash:
TreasuryDavid Uren and Roy EcclestonFebruary 25, 2005 http://www.theaustralian.news.com.au/common/story_page/0,5744,12364202%255E601,00.html http://www.theaustralian.news.com.au/common/story_page/0,5744,12364202%5E601,00.html

PETER Costello's closest adviser fears the US is heading for a devastating financial crash that could ravage Australia's economic growth.As the Reserve Bank considers raising interest rates at its board meeting next Tuesday, Treasury Secretary Ken Henry likened the flood of money pouring into the US to support its budget and current account deficits to the stockmarket's dotcom bubble of the late 1990s. Were it suddenly to stop, there would be shockwaves felt throughout the world's economies. The financial crash feared by Dr Henry would involve a sharp fall in the US dollar and a bond market sell-off, which would push up US and world interest rates. This would hit US economic growth and, as a result, cut Chinese exports of manufactured products to the American market. In turn, this would threaten the boom in Australian mineral exports to China. Fears that the world economy is in grave danger are growing in the major financial capitals. The International Monetary Fund, which is responsible for stability of the world economy, also warned yesterday of a sudden collapse. IMF managing director Rodrigo de Rato said urgent combined international action was required to head off the dangers. The main cause of concern is the fact the US is running a trade deficit of about $US600billion ($760billion) and a budget deficit of about $US430billion for 2005. US imports are almost 50per cent greater than the country's exports, with the deficit being financed by international central banks and funds managers. Despite signs that the deficit is getting bigger, money is pouring into the US from Asia and Europe at such a rate that the US has been able to keep its long-term interest rates steady at 4.2 per cent since the middle of last year. Dr Henry said the flood of money was "worryingly reminiscent of Federal Reserve chairman Alan Greenspan's warning in 1996 of irrational exuberance in US stocks". He said that, as with the dotcom bubble in the 1990s, one could not tell how long it would keep going, but it would burst eventually. Dr Henry's comments, made to a meeting of Asian treasurers in Sydney yesterday, reveal that Treasury is much more worried about the health of the world economy than is the Reserve Bank. Reserve Bank governor Ian Macfarlane said last week that he did not think the US current account deficit was a serious threat. "I suspect the rest of the world will continue to finance the US current account deficit," he said. But if it did not, all that would happen would be a fall in the US dollar, which would not have serious consequences. The Reserve Bank expects world economic growth to slow only slightly from last year, when it recorded the fastest growth in almost 30 years. The different views about the economic risks may be aired at the Reserve Bank meeting on Tuesday. Dr Henry sits on the Reserve Bank board. The bank does think there are risks of financial collapse in the US, but believes it would be caused by the complexity of new financial products. The IMF also thinks economic growth will remain firm over the year ahead, but Mr de Rato says there are "serious threats and challenges ahead". Mr de Rato warned that it was highly unlikely that the US would continue to have access to "easy credit", based on its present economic policies. Mr de Rato said the fall in the value of the dollar should act as a "timely wake-up" to policy makers around the world to tackle the imbalances in the world economy. Mr de Rato said these included not only the US's deficits, but also resistance to economic reforms in Europe and Japan, as well as China's fixed exchange rate. Dr Henry said the problems went beyond the American deficits, which he said were mirrored by excessive surpluses in Asia. He said Asian countries were not allowing their domestic economies to grow fast enough, and were relying too much on exports. This put them at risk in any world economic downturn. The boom in investment in American financial markets could be brought to a halt by a number of developments, Dr Henry said. A slowdown in American growth could lead international private investors to pull out of the country. Foreign central banks, which have been buying long-term American government bonds, are already facing big losses as a result of the fall in the value of the greenback. "What if they change their mind?" Dr Henry asked. He said it was imperative that the Americans take action to reduce their budget deficit, while they should allow the value of the US dollar to fall further.

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