Thursday :: Mar 30, 2006

Ready To Fall

by pessimist

The American economy is beginning to make bears out of tigers:

East Asian economies must prepare for possible sharp US dollar slide - ADB

TOKYO (AFX) - With the US trade deficit at a record high and global interest rates rising, East Asian economies need to be prepared for a possible sharp slump in the value of the dollar, the Asian Development Bank warned here. The ADB is working on several indices of Asian currencies that could be helpful to monitor exchange rate movements in the case of a sharp dollar decline, though its main aim is to help develop regional bond markets. Because of the highly inter-dependent nature of the East Asian economies, if countries worked together to allow their currencies to collectively appreciate against a tumbling dollar then the cost of adjustment would be spread.

'Our suggestion to Asian countries is: don't take this continuous financing of the US current account deficit as given. Any shock hitting the US economy or the global market may change investors' perceptions given the existing global current account imbalance,' Masahiro Kawai, the ADB's head of regional economic integration, told reporters on a trip here.

'The possibility of a US dollar collapse or sharp decline may be small at this point
but it would generate very significant turmoil so East Asian economies... ought to be ready for that,'
Kawai said.

What will investors think about reports that the US economy didn't grow as much as forecast?

U.S. economy grows 1.7 percent in last quarter of 2005

WASHINGTON, March 30 (Xinhua) -- The U.S. economy increased at an annual rate of 1.7 percent in the final quarter of 2005, slightly higher than the 1.6 percent rate estimated a month ago, the Commerce Department reported on Thursday. However, the gain in the fourth quarter of last year is still the slowest pace in the past three years ... since 0.2 percent gain in the last quarter of 2002.

The report showed that U.S. consumer spending in the final quarter of 2005 grew at a pace of just 0.9 percent, the weakest since the first quarter of 1995. A cut in spending on big-ticket goods, such as cars, was the main culprit behind the lethargic showing in overall consumer spending which accounts for about two-thirds of U.S. gross domestic product.

Cuts in spending by the U.S. government also contributed to the fourth-quarter's weak performance.

The reduced consumer spending indicates that the common man is more in touch with the realities of life, and that they are out of capital, than Bu$hco is:

U.S. economy hits slow quarter
Mar. 30, 2006. 10:28 AM

The 1.7 per cent growth rate in the fourth quarter marked a big loss of momentum from the third quarter's zippy 4.1 per cent pace. The fourth quarter's slowdown was blamed on lingering fallout from the Gulf Coast hurricanes and elevated energy prices, which especially caused consumers to tighten their belts.

In addition, inflation is becoming large enough to get the Fed's attention:

An inflation gauge closely watched by the Federal Reserve showed that core prices — excluding food and energy — rose at a 2.4 per cent pace in the fourth quarter. That was higher than the 2.1 per cent growth rate previously reported for the period and marks a substantial pickup from the third quarter's 1.4 per cent pace.

Incoming chairman Bernanke is already adept at disbursing economic happy talk - even if leavened with a touch of reality:

Federal Reserve chairman Ben Bernanke and his colleagues said Tuesday that the economy has snapped out of its end-of-year doldrums and has 'rebounded strongly' in the January-to-March quarter. "But (it) appears likely to moderate to a more sustainable pace" going forward, the board said.

This touch of reality is sure to get the attention of the investors watching the US economy - and their investment in our huge deficit - through the action the Fed is expected to take:

To fend off inflation, Bernanke, at his first meeting as Fed chairman on Tuesday, boosted a key interest rate to 4.75 per cent and hinted further increases were possible.

In doing so, Bernanke and his colleagues stuck closely to the rate-raising script written by former chairman Alan Greenspan. Economists predict another rate increase will come at the Fed's next meeting, May 10.

All of you people with adjustable-rate mortgages: you might want to consider a refinance to a fixed-rate as fast as possible!

Not all of the news is bad, provided one isn't looking too far into the future:

Fresher economic barometers, meanwhile, have flashed good signs for the economy. The jobs market is improving, with companies adding a sizable 243,000 positions in February. The nation's unemployment rate of 4.8 per cent, meanwhile, is close to a 4 1/2-year low reached in January. Americans' optimism in the economy rebounded in March, climbing to a nearly four-year high, the Conference Board reported Tuesday.

Thursday's report also showed companies' profit growth gaining ground in the fourth quarter of 2005. One measure of after-tax profits in the GDP report showed profits increased by 13.8 per cent, a turnaround from the third quarter's 4.3 per cent decline.

Still, those things haven't helped President Bush's standing with the public.
He has been mired in some of the lowest job-approval ratings of his presidency, according to polls.

One is tempted to wonder why it is that it takes so long for the realities of empty economic promises to sink in with some people. Now that it is too late to do much about the deficits, about the only thing left to do - assuming that there is still time - is to emulate the Asian investors and prepare for a decline. Pay off what debt you can. Stop spending frivolously on things you don't need, because you the worker aren't getting the money you need in the first place like businesses are. Do you think they are going to care about you when the crunch comes?

No one is going to care about you and yours but you and yours.

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