Weblogsky: Stormy Weather

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Stormy Weather

Business was looking better in the last quarter of 2004, but I was suspicious of positive numbers in various reports, knowing that an election was coming and the incumbents would be dropping in those rosy filters, hoping to convince constituents of an economic recovery and smooth sailing ahead. Since psychology is an important factor where economic health is concerned, a belief that things are okay can be self-fulfilling – for a while. The question now, reflected in the New York Times article "The Perfect Storm That Could Drown the Economy", is whether complex real-world factors will create a "perfect storm" economically, a storm that will blow economic optimists into the maelstrom.

Just look at the many obvious and worrisome portents. The government each year spends much more than it brings in, and so the nation has a large budget deficit ($412 billion in fiscal 2004, and growing). Americans also import far more goods than they export, and so the nation has record trade and current account deficits.

As consumers, Americans personally spend significantly more than they earn. Worse, some imbalances are eerily reminiscent of conditions that helped touch off recent economic crises: Mexico in 1994, Asia in 1997, Russia in 1998 and Argentina in 2002. Throw in rising interest rates, warnings of a housing bubble and the potential for higher inflation and slower growth (a k a stagflation) - and you can understand why some economic analysts may be plumbing the New Testament for inspiration.

The article in the Times reminds us that we depend on foreign sources for more than just oil – "The United States finances its spendthrift ways by selling dollars and dollar-denominated securities (like Treasury bills) to foreign creditors, mostly to central banks in Asia. To sustain growth, the United States needs foreign creditors to continue to add to their piles every day." If they decide to cut back, that would have an effect. Meanwhile the housing market we depended on to get us through the stock market tumble after the "bubble" burst could stall if interest rates increase. The resulting recession could have a global ripple effect that could result in a full-blown global crisis.

(Note that many who opposed Bush's "experiment" in Iraq did so, not because they didn't think it would be a great idea to topple Saddam and build democracy in the Middle East, but because we couldn't afford it. The war has been an ongoing drain when deficits were already increasing substantially).

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