November 25, 2003

Yet Another Bear

The Economist's Buttonwood Tree turns out to be a bear in disguise. Who'd a thunk it?

Economist.com | The Buttonwood column: ...investors sense a chill beneath the warm glow of the numbers. One cold wind blowing across this particular recovery is that Americans are up to their necks in debt. With short-term interest rates at a 45-year low, households are spending some 13% of their disposable income on servicing their debts—a higher number even than in the sharp recession of the early 1980s, when the Federal funds rate topped 13%. How much longer can they carry on spending at this rate, let alone increase it? If they don't, then someone else will have to spend on their behalf.

The government, perhaps? The Bush administration has turned a budget surplus of 2.4% of GDP into a deficit that official numbers say will amount to 4.3% of GDP next year. Not much room, in other words, to raise spending. Nor do American companies have oodles of money to play with. For all the talk of restructuring, they continue to increase their borrowing, though at least a slowdown in the rate at which they borrow and better profitability mean that their dreadful financial ratios are starting to look better than they were. Whether they will continue to do so is another matter.

The chillest wind of all is the rising protectionist nonsense sweeping Washington as it prepares for an election year. Undeterred by having its steel tariffs recently declared illegal by the World Trade Organisation, the administration last week slapped quotas on a range of Chinese textiles, including bras, capping (cupping?) the rise in their imports. And this week it imposed stiff tariffs on Chinese television sets.

We are meant to laugh this off as a bit of electioneering hokum: the administration's heart, we are supposed to believe, lies with free trade. But George Bush is a man who wants to get re-elected and seems prepared to sacrifice the long-term economic good--assuming (a big assumption) he knows how it is best served--to get back into the Oval Office. Mr Greenspan, who has forged a career out of obscure, elliptical comments, had this to say, and it needed no deciphering: "It is imperative that creeping protectionism be thwarted and reversed.:

Posted by DeLong at November 25, 2003 03:18 PM | TrackBack

Comments

Maybe consumers spend a bit less and rebuild their savings. And maybe the proceeds finance a narrower net exports deficit and higher capital spending. Maybe Say's Suggestion holds.

Posted by: Gerard MacDonell on November 25, 2003 06:25 PM

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I don't get it. The article doesn't make any sense.

In the first paragraph they say we have too much debt, and shouldn't buy any more stuff.

But we should keep on importing more and more stuff, that we really shouldn't buy because we have too much debt.

Or maybe you just put a bunch of paragraphs together to see if anybody would catch it.

So how about if they take off the steel tariffs. If it is true that the world is producing too much of it, it doesn't mean that they are going to quit fighting about it just because they take off the tariffs.

Posted by: northernLights on November 25, 2003 08:23 PM

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Maybe consumers spend a bit less and rebuild their savings

Yes, Gerard and what then happens to those overgeared companies that depend on healthy sales to repay their (foreign financed) loans? And when a few of them or their bank intermediaries default, what happens to the value of the greenback?

The US has put itself in a very fragile position masked by apparent prosperity - just like some Asian countries did in the 90s, and for rather similar reasons (the combination of crony capitalism and a big budget deficit). As a foreigner I think those now lending to the US are going to get their fingers badly burnt.

Posted by: derrida derider on November 25, 2003 09:37 PM

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Maybe consumers spend a bit less and rebuild their savings

Yes, Gerard and what then happens to those overgeared companies that depend on healthy sales to repay their (foreign financed) loans? And when a few of them or their bank intermediaries default, what happens to the value of the greenback?

The US has put itself in a very fragile position masked by apparent prosperity - just like some Asian countries did in the 90s, and for rather similar reasons (the combination of crony capitalism and a big budget deficit). As a foreigner I think those now lending to the US are going to get their fingers badly burnt.

Posted by: derrida derider on November 25, 2003 09:38 PM

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At least, though, this shows that the concern of the U.S. economists over the Bra Crisis (and the corresponding decrease in size of the Victoria's Secret Bra Catalog), has now spread overseas to British economists. Perhaps economists of other nationalities will join in as well.

Posted by: northernLIghts on November 25, 2003 10:30 PM

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>>Or maybe you just put a bunch of paragraphs together to see if anybody would catch it.

I'm not sure I see any contradiction in the article, regardless what one thinks of The Economist's editorial position. Throwing up tariffs isn't exactly the best way to shrink consumer spending, as people might just spend their money on domestic goods. I'm sure The Economist writers would do nothing about this borrowing binge, and have the discipline of the market sort out the mess when the bubble finally pops. Maybe raising interest rates *slightly* would deflate it safely, but I don't really know. Like DD said, it could ripple through the rest of the economy.

Posted by: Harrow on November 26, 2003 09:05 AM

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Though I am sure we have a private and public debt problem, investors are sure there is no problem. Stock prices have risen markedly amost across the market, bond prices have stayed high and high yield bonds have gained marketedly.

Where is the problem?

My economic mind worries, my investment mind has been an increasingly roaring bull since summer 2002. Why should I take investment advice from the Economist? Economic advice, possibly, but not investment advice.

We are busily pushing off our debt problems to the future. I wish it were no so, and I blame this awful Administration and Alan Greenspan for the public debt problems we are going to face in future, but the future is not now. Now, the Fed is happy and I am happily invested.

Posted by: anne on November 26, 2003 12:59 PM

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Waiting for the American consumer to stop spending, when the Fed and Treasury are doing all things to encourage spending, has been a fool's wait. There has been every reason to be bullish this year and world markets are lovely to behold.

Hard to find a foreign market that is not up over 20% in dollar terms. Emerging markets index is up over 40%. I'll worry tomorrow....

Posted by: anne on November 26, 2003 01:05 PM

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>>Waiting for the American consumer to stop spending, when the Fed and Treasury are doing all things to encourage spending...

There are some central banks that recognize that consumer buying binges and overheated home prices can be a concern: Australia and Britain have raised interest rates recently for those exact reasons. Maybe they think it will lead to inflation in the near future, or in the absence of any inflationary pressure will contribute to deflation after the bubbles burst. Mind you, both those countries have had mediocre stock markets this year (in local terms), so I guess it's less politically painful to get tough.

Posted by: Harrow on November 26, 2003 07:44 PM

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I'm with Anne on this one.

If foreigners finally wish to start spending their own income instead of sending it here, and at the same time the US consumer is pooped even at current low interest rates then to me that sounds like a perfect match. It will allow an extended period of low interest rates and at the same time the trade deficit will narrow in the coming years. And for now we have some excess capacity to put to use and it looks like we are finally beginning to use it.

The real problems won't become evident for some years, when both foreign and domestic consumption take off for demographic reasons, raising global interest rates and inflationary pressure and reducing growth to a crawl. I think we're only at the very beginning of this process, perhaps at a turning point, but for now we still have the very nice situation of many people eager to work and invest, and the cycle seems to be going the right way.

Posted by: snsterling on November 26, 2003 09:54 PM

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