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WHY THE WORLD LOVES AMERICA'S DEFICITS
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At the end of last year, the nation's financial
deficit - what the United States owes the rest of the world,
minus what the rest of the world owes the United States -
amounted to more than $3 trillion, and it's still growing.
This account deficit means the United States imports more
than it exports. To fill the gap - and its budget deficit
- it borrows heavily. However, while the trade deficit weakens
the dollar, it strengthens the world! For Europe, Japan, China,
and even America, as long as the nation's trade and budget
deficits continue to grow and are financed by the world's
central banks, everyone seems to win! Let me explain.
Let's take The European Central Bank "ECB" as an
example. The ECB is the central bank for Europe's single currency,
the euro. Their main task is to maintain the purchasing power
of the euro and thus price stability in the euro area. The
euro area comprises the 12 European Union countries that have
introduced the euro since 1999. The ECB needs to be able to
"place their paper" at a reasonable cost when they
borrow, the same way any corporation that borrows would have
to do. Given the fact that Germany and France are having a
horrendous time keeping their budget deficits below three
percent, and Greece is regularly "cooking their books"
and running six percent budget deficits, you would wonder
who in their right mind would be interested in putting their
cash in sovereign euro debt.
The current account deficits - the broad gap between exports
and imports of goods and services - are mushrooming out of
control so much so that on a relative basis, they almost make
the euro look good on an absolute basis. In 1999 when the
euro was introduced, there was great fear that it might fall
apart. Sure, the Europeans hate the weak dollar and the fact
that the Americans and Chinese are competing with unfairly
low prices. But for now, making the euro a rival to the dollar
as a world reserve currency is more important! As the euro
is being firmly established, European countries and businesses
can borrow at subsidized rates because of the pressure to
get out of the dollar. Inflation in Europe is also lower and
oil is relatively inexpensive. Euro pride can run high!
Another example is The Bank of Japan's buying of limitless
amounts of United States' treasury and agency securities.
This has allowed Japan to run their printing press much faster
than they could otherwise without suffering embarrassment.
Japan's budget deficit is approximately seven percent, which
makes the United States look fiscally responsible in comparison!
In 2005, Japan will have about $240 billion worth of fresh
Yen bonds to sell to finance their government deficit but
very few people will want to buy them with interest rates
there at almost zero. When Japan is buying dollars to hold
down the Yen, no one thinks twice about the extra monetization.
What's more important, is the fact that as long as the world
thinks there is money to be made from dumping the dollar against
the Yen, speculators and gullible investors will buy the hundreds
of billions in new government debt Japan has to place. (In
reality, Japanese fiscal policy remains bankrupt.) In addition,
Japan gets to build up massive dollar credits it can use in
the future so it can continue to attack and destroy industries,
such as the American Auto Industry (GM just announced another
seven percent cut in U.S. jobs). Of course, the Japanese would
like to keep their foreign exchange reserves safe, but funding
their deficits and getting American jobs is more of a priority.
The story on China is similar to Japan, only more so. In
2004, speculating investors invested over $95 billion in China.
This cash is in addition to China's $150 billion trade surplus
last year and the massive $610 billion in foreign currency
reserves they have amassed. China is running the fastest industrialization
effort in the history of the world using classical "mercantilist
trade policies". A greatly undervalued Yuan is pegged
to the dollar. These speculating investors may never get a
return on their money, much less a return of their money,
but they are confident they can't lose as the Yuan will have
to revalue against the dollar. Don't hold your breath. (Obviously,
these investors have never read history; even recent history!)
China has been winning the economic war against America as
our factories are closed down and relocated there. Just like
the Japanese, China would like to keep their foreign exchange
reserves safe. However, for now, with the dollar going down
against the euro and the Chinese Yuan fixed to the dollar,
the Chinese government can begin their "big push to collapse
and replace European industry" after helping to reduce
American production to a meager 45 percent of our nation's
consumption. China has recently witnessed worker riots, so
getting Western jobs remain the number one priority just to
keep a lid on the domestic, political situation.
Clearly, one of the most important things for the Bush Administration
to focus on is getting foreign central banks to finance a
major portion of our budget and trade deficits. In the first
nine months of 2004, foreign central banks purchased $315
billion of our financial assets. This is equivalent to about
three-quarters of the U.S. trade deficit, and more than enough
to pay for the war in Iraq. Temporarily, this central bank
buying of dollar assets holds down our interest rates and
keeps our economy in a housing boom, with false prosperity
and no savings. Our government seems to have decided that
as long as our country is the military superpower, the strategy
of exporting troops to the Middle East and jobs to Asia -
in exchange for a lock on the oil reserves and cheap imports
- remains more important than rebuilding American industry.
So for now, all the major countries seem to "win"(as
their central banks print up new money to finance our trade
deficit) because (i) the euro is secure; (ii) Japan can finance
a seven percent deficit; (iii) China gets everyone's jobs;
(iv) America gets its war paid for; (v) every major country
gets financed, and (vi) all the produced goods get sold with
that last $600 billion bought by Americans on credit.
Perhaps things will change as inflation bursts out into the
open and exposes the fraud of prosperity through printing
money. Or, at some point, central banks may discover that
not only do they need to finance new U.S. debt being created
but all the old debt as well, as the private sector dumps
their dollars en masse. This would surely put into question
the seemingly limitless dollar asset buying spree of the world's
central banks.
For the future, however, Bush's wish list, led by the privatization
of Social Security and a reform of the tax code, seems to
leave little space for policies that would reduce our country's
deficits. Greenspan, himself, in a speech to German bankers
recently warned that "foreigners would probably demand
higher interest rates and bond yields to hold American debt".
The real question may be "when does the debt become so
big that foreigners begin to worry about getting their money
back with a reasonable return?" With America taking the
short-term economic view, and Asia taking the long-term economic
view, the future will prove very interesting.
The losers in all this will surely be those who want to save
in dollars, insist on holding investments denominated in dollars,
and Americans who would simply like a job working in the most
efficient and productive factories in the world, rather than
sit back and watch them be built, with the latest technology,
half a world away. Unfortunately, since most Americans will
continue to use dollars, you can guess who's going to be the
big losers here - just look in the mirror!
******
Richard Benson
President
Specialty Finance Group LLC
Member NASD/SIPC
www.sfgroup.org
800-860-2907
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