Sunday, March 07, 2004
The U.S.S. Economy is not the H.M.S Titanic!!
Everyone from Paul Krugman to Jim Rogers to George Soros have expressed great concern about the current state of the U.S. economy. I happen to agree with most of their points. I also think some sort of corrective action is required on debt, taxation etc if the U.S. economy is to not tank (and take the rest of the world's economy along). So, I read with interest Mark Erikson's piece on why the fears about the state of the U.S. economy are overblown.
The US dollar fell by 20 percent against the euro and 10 percent against the yen last year. Since George W Bush became president, the United States has lost well over 2 million manufacturing jobs. New jobs are slow in being created. The 2003 current account deficit totaled US$580 billion (5 percent of gross domestic product, or GDP); the 2004 budget deficit will be about $500 billion - the vaunted "twin deficit". The US savings rate is near zero. So has the US economy once again become the basket case it was under Jimmy Carter before Federal Reserve chairman Paul Volcker and president Ronald Reagan rescued it and restored it to renewed vigor in the 1980s?
The short answer is, not by a long shot. At an average 6 percent GDP growth rate in the second half of 2003, the US economy grew at a rate 30 (!) times the eurozone's. Without such fast US growth, which Europeans can only dream about (most likely forever) and which drew in huge exports from the eurozone and Asia, eurozone growth would have been negative, much-admired Chinese growth zero, and recently picking up Japanese growth 1.3 percent instead of the reported 2.7 percent. A few simple calculations prove the point: The eurozone's 2003 trade surplus with the US was $75 billion or 0.85 percent of GDP, more than double the eurozone's 0.4 percent GDP growth. China's trade surplus with the US was $124 billion or 10.4 percent of GDP - slightly higher than GDP growth. Japan's trade surplus with the US was $66 billion or 1.4 percent of GDP - about half of GDP growth.
Current account deficits? Budget deficits? Low savings? One nation's current account deficit is another's capital account surplus. As things stand, Asian exporters and public and private investors are demonstrably prepared and eager to invest their surpluses where they find the best markets and best risk rewards - the United States. Capital inflows to the US well exceed, and increasingly so, the trade and current account deficits.
The budget deficit, like any debt, is more easily financed and built down in a fast-growing economy. The Congressional Budget Office (CBO) estimates that this year's deficit will come in at $477 billion. Were GDP to grow by 5 percent to $11.815 trillion in 2004, the deficit would be about 4 percent of GDP, roughly in line with the deficits of the major eurozone economies. The CBO also estimates that the deficit will be nearly cut in half in three years' time to $242 billion. With continuing moderate economic growth, the deficit will be below 2 percent of GDP by 2007 - another number Europeans can only dream about.
Why do I get the feeling Mr. Erikson has plucked some of these numbers out of thin air and twisted them to suit his beliefs? If Erikson is to believed, the reduction in manufacturing jobs, for example, is coming to an end. Am I the only person who thinks he's lving in la-la land?
The US dollar fell by 20 percent against the euro and 10 percent against the yen last year. Since George W Bush became president, the United States has lost well over 2 million manufacturing jobs. New jobs are slow in being created. The 2003 current account deficit totaled US$580 billion (5 percent of gross domestic product, or GDP); the 2004 budget deficit will be about $500 billion - the vaunted "twin deficit". The US savings rate is near zero. So has the US economy once again become the basket case it was under Jimmy Carter before Federal Reserve chairman Paul Volcker and president Ronald Reagan rescued it and restored it to renewed vigor in the 1980s?
The short answer is, not by a long shot. At an average 6 percent GDP growth rate in the second half of 2003, the US economy grew at a rate 30 (!) times the eurozone's. Without such fast US growth, which Europeans can only dream about (most likely forever) and which drew in huge exports from the eurozone and Asia, eurozone growth would have been negative, much-admired Chinese growth zero, and recently picking up Japanese growth 1.3 percent instead of the reported 2.7 percent. A few simple calculations prove the point: The eurozone's 2003 trade surplus with the US was $75 billion or 0.85 percent of GDP, more than double the eurozone's 0.4 percent GDP growth. China's trade surplus with the US was $124 billion or 10.4 percent of GDP - slightly higher than GDP growth. Japan's trade surplus with the US was $66 billion or 1.4 percent of GDP - about half of GDP growth.
Current account deficits? Budget deficits? Low savings? One nation's current account deficit is another's capital account surplus. As things stand, Asian exporters and public and private investors are demonstrably prepared and eager to invest their surpluses where they find the best markets and best risk rewards - the United States. Capital inflows to the US well exceed, and increasingly so, the trade and current account deficits.
The budget deficit, like any debt, is more easily financed and built down in a fast-growing economy. The Congressional Budget Office (CBO) estimates that this year's deficit will come in at $477 billion. Were GDP to grow by 5 percent to $11.815 trillion in 2004, the deficit would be about 4 percent of GDP, roughly in line with the deficits of the major eurozone economies. The CBO also estimates that the deficit will be nearly cut in half in three years' time to $242 billion. With continuing moderate economic growth, the deficit will be below 2 percent of GDP by 2007 - another number Europeans can only dream about.
Why do I get the feeling Mr. Erikson has plucked some of these numbers out of thin air and twisted them to suit his beliefs? If Erikson is to believed, the reduction in manufacturing jobs, for example, is coming to an end. Am I the only person who thinks he's lving in la-la land?
