Greenspan warns about deficit

[Ugg]

Dollar Drops After Greenspan Warning on Current-Account Deficit

Nov. 19 (Bloomberg) -- The dollar fell to its lowest in more than four years against the yen and dropped versus the euro after Federal Reserve Chairman Alan Greenspan said foreign investors will tire of financing the record current-account deficit.


``Given the size of the U.S. current-account deficit, a diminished appetite for adding to dollar balances must occur at some point,'' he said at the European Banking Congress in Frankfurt.


Against the yen, the dollar fell to 103.23 at 9:18 a.m. in New York, from 104.18 late yesterday, according to electronic currency dealing system EBS. It fell as low as 103.17, the weakest since April 2000. The U.S. currency also declined to $1.3027 per euro from $1.2961. The dollar has dropped to five records against the euro in two weeks.


``This is very dollar negative,'' said Mark Austin, head of currency strategy at HSBC Holdings Plc in London. ``The Fed has concluded that the current-account deficit is unsustainable and it would rather have some controlled dollar depreciation now than a dollar crisis at some point later on.''

The dollar's decline began earlier today on speculation finance ministers and central bankers from the Group of 20 economies, who gather today in Berlin, will fail to agree on the need to halt the U.S. currency's slide. Greenspan will attend the meetings.

``The dollar bears could not have hoped for better comments than this,'' said David Mann, a currency strategist at Standard Chartered Plc in London. ``All the comments are very, very negative especially given that Greenspan had been leaving dollar comments to the U.S. Treasury secretary.''

Widening Shortfall


The shortfall in the current account widened to a record $166.2 billion in the second quarter. The gap is equivalent to 5.7 percent of gross domestic product, up from 5.1 percent in the first quarter, meaning the U.S. economy needs to attract about $1.8 billion a day to maintain the value of the dollar, based on Bloomberg calculations. The current account is a measure of trade, services, tourism and investments.

``International investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing the U.S. current account deficit and rendering it increasingly less tenable,'' Greenspan said.

Greenspan's comments suggest U.S. officials favor a weaker currency, said Michael Woolfolk, a currency strategist in New York at Bank of New York. U.S. Treasury Secretary John Snow said in London on Nov. 17 that agreements to manage currencies are ``at best unrewarding and checkered.''

Rebuffing Europe

Snow's comments have been interpreted by some traders as a rebuff to European complaints about the pace of the dollar's decline. German Economy Minister Wolfgang Clement said in an interview that European Central Bank, U.S. and Asian policy makers should take action.

The G-20 includes the Group of Seven industrialized nations plus the biggest emerging economies.

``I don't think you're going to get a coordinated effort'' to push the dollar higher, said James McCormick, head of currency strategy in London at Lehman Brothers Holdings Inc. ``U.S. policy makers are happy with a weaker dollar as long as it's an orderly move.''

`Big Story'

Lehman, the most accurate forecaster of exchange rates in a Bloomberg survey last quarter, yesterday lowered its predictions for the dollar on expectations record U.S. current-account and budget deficits will diminish demand for the U.S. currency.

``The big story for 2005 is that the dollar downtrend continues,'' said McCormick. The bank cut its three-month dollar forecasts to $1.34 per euro from $1.30 and to 102 yen from 104. ``As we move into the second half of the year the yen really takes on the lead in this dollar down-move.''

Gains in Asian currencies will outpace the euro, which may peak at $1.40 next year, according to Lehman. ``The nascent rally in Asian currencies continues to gain pace as markets recognize the seismic shift in Asian currency policy that is currently under way,'' McCormick wrote in a weekly report.

South Korea's won is heading for the biggest weekly advance against the dollar in six years, having soared 2.9 percent, and yesterday reached its strongest since 1997. The won rose as Finance Minister Lee Hun Jai told reporters in Seoul yesterday the government will be guided by ``the market's supply and demand'' on exchange rates.





In other words, gw's first act out of the gate must be a serious effort to reduce the deficit. Without that effort, there will be less foreign investment and interest rates will skyrocket.

Bloomberg article (http://www.bloomberg.com/apps/news?pid=10000101&sid=aBNTR.I.Xu3o&refer=japan)

[IJ Reilly]

Decoding Greenspan's characteristically cryptic remarks, we're hurtling headlong into the deep poop. Perhaps now that the Guru of Greebacks has made his opinion known, we will at least hear fewer Pollyanna remarks from Republicans about how deficits don't really matter and it's all going to work out fine in the end.

[miloblithe]

I guess now's the time in my life to go start earning Pounds, or Euros.

[Xtremehkr]

Link (http://www.americanprogress.org/site/apps/custom/cap/findorg.asp?c=biJRJ8OVF&b=45294)

Topic:**Economy - Deficit

Speaker:**Bush, George - President

Date:**10/17/2003

Quote/Claim:
"If this were a spending contest, I would come in second. I readily admit I'm not going to grow the size of the federal government like [Gore] is." [Source: Debate transcript]

Fact:
"The numbers are astonishing. Congress is now spending money like a drunken sailor. And I've never known a sailor, drunk or sober, with the imagination that this Congress has." - John McCain (R-AZ), Fox News, 11/30/03

"Conservative Republican frustration over the failure of the Bush administration and the House Republican leadership to restrain federal spending has boiled over in recent days, producing a rare confrontation between GOP lawmakers and party leaders." - The Hill, 12/3/03


Though they have backed off on this lately.

Topic:**Economy - Deficit

Speaker:**Bush, George - President

Date:**10/16/2003

Quote/Claim:
"I came to this office to confront problems directly and forcefully, not to pass them on to future Presidents or future generations." [Source: White House Web site]

Fact:
“When the Treasury Department tallies up final figures later this month, it is expected to show a federal budget deficit between $370 billion and $380 billion for 2003,” one of the biggest debts passed onto another generation in American history. - Wall Street Journal, 10/9/03


What can I say, the President is a liar.

Topic:**Economy - Deficit

Speaker:**Bush, George - President

Date:**1/29/2002

Quote/Claim:
"Our budget will run a deficit that will be small and short term….” [Source: White House Web site]

Fact:
"The federal deficit will hit a record $477 billion this year and get worse if lawmakers cut taxes or increase spending, the Congressional Budget Office projected Monday." - CNN, 1/26/04

"The idea that this is manageable or that we are going to grow our way out of the problem is just flat false." - U.S. Comptroller General David Walker, LA Times, 10/7/03

"The U.S. government's budget deficit came under fire on Wednesday from two global institutions (OECD and the IMF) saying a plan to halve the record gap by 2009 may not be enough to stop long-term damage to the world economy." - Reuters, 4/14/04


Again, he's lying.

Topic:**Economy - Deficit

Speaker:**Bush, George - President

Date:**2/27/2001

Quote/Claim:
"Many of you have talked about the need to pay down our national debt. . . I agree. We owe it to our children and grandchildren to act now." [Source: White House Web site]

Fact:
"Deficits as far as the eye can see. That was the word this week from the White House, which projected the federal government will spend a record $455 billion more than it takes in this year, and $475 billion more next year." - MSNBC, 7/18/03


George, I thought you are a religious man, do you know what is going on?

Topic:**Economy - Deficit

Speaker:**Bush, George - President

Date:**2/8/2004

Quote/Claim:
"The budget I just proposed to the Congress cuts the deficit in half in five years." [Source: White House Web site]

Fact:
White House estimates neglect inevitable costs. The President's proposal to cut the deficit in half deliberately "omits a number of likely costs" such as the continued cost of Iraq and its own defense spending plans. All told, he is proposing roughly $3 trillion in new tax cuts and spending, including $1 trillion to make his tax cuts permanent, $70 billion for the Alternative Minimum Tax, and $50 billion more for war in Iraq. The result is that the deficit is predicted to be "in the range of $500 billion in 2009" – not even near half of what it currently is. - CBPP, 1/16/04; Washington Times, 1/20/04; Reuters, 2/2/04


I'm speechless, it goes on. What kind of crazy plan does this man have?

[Xtremehkr]

Topic:**Economy - Deficit

Speaker:**Snow, John - Treasury Secretary

Date:**1/8/2004

Quote/Claim:
"[The deficit] is not historically out of range, and it is entirely manageable." [Source: Slate]

Fact:
"A report by the IMF says that the United States is running up a foreign debt of such record-breaking proportions that it threatens the financial stability of the global economy." - NY Times, 1/8/04

"Unless taxation reaches levels that are unprecedented in the United States, current spending policies will probably be financially unsustainable over the next 50 years." - CBO, 12/22/03


Though the theory that this is a plan to kill the government as we know it has been floated for quite a while now. Which would make us the only advanced country on earth that operates without a government, I wonder how that will work out, given the essential role government has played in the development of the nation. Given what most Bush supporters know, they would not have a clue as to what or how government has done this and are only looking at it from the perspective that they have been promised more wealth as a result of less government.

If it works, there will be another very hard lesson learned because greed has a tendency to eat itself. Hopefully it doesn't lead to another great depression.

[Xtremehkr]

Topic:**Economy - Deficit

Speaker:**DeLay, Tom - House Majority Leader (R-TX)

Date:**11/19/2003

Quote/Claim:
"We have maintained fiscal discipline in the nation's capital." [Source: House Majority Web site]

Fact:
Despite a $480 billion deficit, "the number of pork projects skyrocketed from under 2,000 five years ago to 9,362 in the 2003 budget. Total spending on pork projects has correspondingly increased to over $23 billion." - Heritage Foundation, 12/3/03


Well, the guy is under indictment for possible felonies, this is just a little fib.

[Xtremehkr]

Topic:**Economy - Deficit

Speaker:**Bolten, Joshua - Budget Director

Date:**12/10/2003

Quote/Claim:
"We still face a deficit in the $500 billion range for the current fiscal year...but that size deficit, at roughly 4.5% of GDP...is not historically out of range; and it is entirely manageable." [Source: White House Web site]

Fact:
"[The] federal budget deficit as "a significant obstacle to long-term [economic] stability." - Alan Greenspan, 5/6/04


Deny, deny, deny.

[Xtremehkr]

Topic:**Economy - Deficit

Speaker:**White House Official Statement

Date:**12/13/2003

Quote/Claim:
"Maintaining Fiscal Discipline: [The President has] continued to restrain spending." [Source: White House Web site]

Fact:
"For the 2003 budget year, which ended Sept. 30, the government recorded a deficit of $374.8 billion, according to revised figures. In November alone, the deficit swelled to nearly $43 billion." - AP, 12/12/03

"Most observers familiar with the budget outlook, including the White House’s Office of Management and Budget, agree that deficits will become even larger after 2013." - Economist Christian Weller, 12/12/03

The House recently passed a massive $373 billion spending bill, laden with pork-barrel spending and controversial provisions as far as the eye could see. "The size of the measure invites abuse. Spending set-asides for home-state projects have grown to extraordinary levels, filling scores of pages in the Congressional Record." President Bush issued a "personal appeal" to Senate Majority Leader Bill Frist (R-TN) to "push the spending package through the Senate" without changes after the House passed the pork-laden bill." - AP, 12/8/03, 12/5/03; WSJ, 12/3/03


Truth!? we don't need no steenking thruth!

[Chip NoVaMac]

Topic:**Economy - Deficit

Speaker:**Snow, John - Treasury Secretary

Date:**1/8/2004

Quote/Claim:
"[The deficit] is not historically out of range, and it is entirely manageable." [Source: Slate]



I take this the same way I hear the arguments that gas prices are not at an all time high when adjusted for inflation. I count myself as some of the Americans that is seeing a shrinking of my buying power.

The property taxes have gone up to 300% what I was paying 12 years ago. My income has just been able to keep up with inflation (outsourcing of jobs, jettisoning of "older" more "expensive" workers are among the causes). Even if I didn't own a home, escalating home pricing has pushed up rents to a point that I would be hard pressed to do better than my mortgage right now. But if the values continue the way they are, I will hard pressed to keep up.

Double digit increases in healthcare cost each year take even more from the take home pay. Saving grace are the low interest rates on cars and homes.

My rant is towards those that in government that don't take fiscal responsibility in government spending. You can't have increased spending with tax increases or fee increases elsewhere, or spending cuts in other areas. You can't have decreased taxes without cutting spending or increasing fees elsewhere.

Finding places to cut is hard. Does it make sense to me in my area to subsidize public transportation for those that are earning over $60K a year, when I don't even see that? And others would say that education and health services for illegal immigrants is a wrong way to spend our dollars. Or the handouts to big business (like the NBA, MLB, & NFL, or any "employer" looking to move an area), when they can afford the burden themselves? Just pick your cause.

Greenspan has been IMO, been a very strong voice in our economy. Now that his time is drawing near on leaving, I worry. Clinton and Bush, both owe a lot to him.

[tristan]

Currency movements are much more complex than this and Greenspan should know better. It's not the budget deficit - European countries have more debt as a percentage of GDP. Its not the trade deficit - we've had that for ages, including during the boom of the 90s.

The main reason that the dollar is down is because we dropped interest rates to 1%, and the Europeans didn't. There's no free lunch - you can't just say "okay, now we don't pay interest anymore" and expect the world to keep loaning you money, especially when the UK's happy to give you 4% on your money.

[Desertrat]

Why is the federal budget deficit brought into this thread? It has zilch to do with the current account deficit...

The irony of Greenspan's statements here is that his policies have directly contributed to the ease of our spending ourselves into this current account deficit.

For those who after two years have finally noticed the decline in the relative value of the dollar against foreign currencies, you ain't seen nuthin', yet. When China gets full standing in the world trade deal (Old Timer's lapse on the name of the group), the renmimbi must float. When that happens, look out.

To bring the fed deficit into it, note that foreign central banks are starting to bow out of buying our treasury notes/bills/bonds. When they actively start to sell, in quantity or as India has done, again: Look out.

"Good" currencies are those of countries which export commodities or food or both...

'Rat

[IJ Reilly]

And here I thought Greenspan's word on the subject would settle the question in favor of fiscal responsibility. Just kidding, really. I knew we'd hear the same voices explaining how the runaway deficit really isn't an issue. That's right, it can only hurt us we fail to keep the faith.

[skunk]

That's right, it can only hurt us if we fail to keep the faith.
Or stop printing money...

[IJ Reilly]

Or stop printing money...

Apostate! I'm not one of those "bring back the gold standard" people, but raising interest rates is one way of insuring that less new money gets printed, so it more or less amounts to the same medicine.

[skunk]

Apostate!
I've a good mind to report you! ;)

[Ugg]

Oops, in a hurry to enjoy some rare Humboldt sunshine this am....

The budget deficit and the current accounts deficit are connected so it's almost impossible to talk about one without the other. It would be interesting to know what percentage of federal and state expenditures are spent on imports. I bet it's a lot larger than we would like to think and this has a huge impact on the current accounts deficit and since few government entities have balanced budgets, contributes to the budget deficit as well. Here in CA, Arnie has been a big proponent of outsourcing state contracts. While it may cut expenditures it is also going to cut state income by reducing income tax.

The massive subsidies given by the government to support the oil industry, thereby subsidizing cheap oil, only make it that much less necessary for the US auto industry to create cars that are competitive on the world market. I sometimes think that it would have been better to let Chrysler sink and true competitiveness take over rather than encouraging mediocracy in US industry. These examples of government support of industries that either overextended themselves or simply made gross management errors show that government intervention only increases budget deficits, mostly through lost income, and encourages current account deficits by encouraging the consumer to look overseas for a better and less expensive product. The airline industry is next in line for massive federal bailouts, they are somewhat protected though by the US policy of not allowing foreign carriers to operate domestic flights. Another sign of protectionism.

Of course, if the government demanded more accountability from US corporations when it comes to boardroom and accounting shenanigans it would have to spend a heck of a lot less and its income would be a lot bigger. THat ain't gonna happen with gw out to make his mark on the world so look for Greenspan's cryptic remarks become reality.

[Desertrat]

"The massive subsidies given by the government to support the oil industry, thereby subsidizing cheap oil..."

Such as?

Note that while the government guaranteed the loans to Chrysler, it never had to follow through. Iacocca managed to get Chrysler turned around without needing further assistance; all loans from private entities were repaid.

As for cars in general, Hondas made in the U.S. have less warranty work done than those made in Japan. Foreign-made cars have less warranty work done than most U.S. made cars, generally--but there are fewer mechanic's bills for American made cars in the hands of second and third owners. Ford/GM/Chiseler generally stuff lasts longer--but for Toyota. :) (My '85 Toy 4WD PU owes many thanks to AutoZone, though.)

"...government intervention only increases budget deficits, mostly through lost income..."

I'll take that out of context and comment that it's inevitable and always. :D

"Of course, if the government demanded more accountability from US corporations when it comes to boardroom and accounting shenanigans it would have to spend a heck of a lot less and its income would be a lot bigger. THat ain't gonna happen with gw out to make his mark on the world so look for Greenspan's cryptic remarks become reality."

Hey, "government" intervened :) to demand quarterly instead of annual reports. That's caused more shenanigans than most anything else imaginable.

'Rat

[IJ Reilly]

More...

Greenspan Issues Warning on Dollar

The Federal Reserve chairman is concerned that foreign investors may unload the U.S. currency because of the growing trade deficit.

BERLIN — Foreigners will eventually sour on U.S. bonds and the dollar because of America's bulging trade and budget deficits, posing significant risks to the nation's economy, Federal Reserve Chairman Alan Greenspan said Friday in remarks that rattled financial markets.

Greenspan told a banking conference in Frankfurt, Germany, that international investors were likely to either unload their dollar-denominated investments or demand higher interest rates. Either scenario would present problems for an economy that is heavily dependent on foreign capital to fuel its free-spending ways.

Some countries have "defused" their trade deficits without significant consequences, Greenspan noted. But, he warned, "we cannot become complacent. History is not an infallible guide to the future."

The Fed chief's concern about the deficits is not new, but his remarks were interpreted by some traders as a warning that a day of reckoning was drawing closer. And they came against the backdrop of the dollar's continued weakness in international currency markets.

After Greenspan spoke, the dollar dropped to its lowest level against the Japanese yen in more than four years. The dollar also fell against the euro, which hit the highest point in its five-year history this week. The stock market fell sharply. The Dow Jones industrial average dropped 115.64 points, or 1.1%, to 10,456.91.

"Greenspan frightened the markets by raising the specter of a dollar panic," said Peter Morici, former director of the Office of Economics at the U.S. International Trade Commission.

The Fed chief also seemed to be practically guaranteeing higher interest rates, saying that investors who weren't hedged against a rise were "desirous of losing money."

...

The question that divides them is whether the descent will be slow and orderly, or quick and panicky.

Joel Prakken, an economist with Macroeconomic Advisers, is in the first camp. "If you look around at the world's economies, there's really none better than ours," he said. "It's not like in the 1980s, when people thought the Japanese or the Germans were going to rule the world, and people wanted to invest in them."

Harry Chernoff, an economist with Pathfinder Capital Advisors, expects the situation to get more unpleasant.

"No nation in the history of the world has ever escaped this level of indebtedness — annual and cumulative — without a severe and totally involuntary adjustment," he said. "The only question is whether we manage our crisis into a catastrophe or whether the international financial community clamps down on us before we have the opportunity to make things even worse."

...

http://www.latimes.com/business/la-fi-greenspan20nov20,0,6416835.story