bush faces economic meltdown - huh?

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    Back in the real world ...

    ... George Bush faces economic meltdown. The dollar's in freefall, oil prices are up, and there are fears foreign investors will stop funding the trade deficit. Maybe beating Kerry was the easy part.

    Edward Helmore in New York
    Sunday November 7, 2004
    The Observer

    Despite being armed with fresh 'political capital' and the will to spend it, President Bush's second-term plan to re-organise social security and simplify the federal tax code will be subject to America's economic health. Even as Wall Street welcomed the President's re-election and Friday's employment report showed an unexpected increase in the rate of job creation, economists, the markets and foreign leaders indicated concern over the weakening dollar.
    Coupled with worries about the high price of oil, the nation's ballooning domestic budget and foreign trade deficits, concerns over the cost of health care, the escalating costs of one war and the costs of likely future adventures, few are willing to make boldly optimistic forecasts for the US economy.

    Despite a rise in the markets, the focus of concern last week was on the dollar's continuing decline and intensifying worries that mounting US budget and trade deficits could collapse the currency. While treasury officials dismissed the scenario as a scare story, economists said the dollar could be heading for a severe sell-off unless the White House and Congress made serious efforts to shrink the budget gap.

    JP Morgan warned clients of a growing 'recognition in the markets of the need for more dollar depreciation'. Company analysts added that the administration's lack of effort to rein in the deficit, and the reliance on foreign investors to pour money into US securities to cover the imbalance, threatened US economic stability. Many predict the dollar will continue to fall, and by as much as 20 per cent.

    'The economy has major negative headwinds, and we're going to see economic growth weaker next year,' says Anthony Chan, chief economist at JP Morgan Fleming Asset Management. Despite the negative forces, he adds, there is some expectation that second-term presidents are more willing to do what is right rather than what is politically expedient.

    The view is not shared by all. Stephen Roach, global chief economist with Morgan Stanley, said that while Bush's re-election might not have any impact on the global economy in the coming year, the President risks widening the deficits if he implements the fiscal stimuli announced during election campaign.

    Moreover, the combination of high oil prices and current account deficits could push the world into a recession next year, he warned. 'Oil prices are 65 per cent above the average over the preceding four years,' he said. 'If oil holds at $50 a barrel for over a month or two, that will qualify as a formal oil shock that has a significant recessionary risk for 2005.'

    Of all the clouds that hang over the US economy, the potential that foreign, and particularly Asian, investment will cease to fund the deficit is darkest. Economists are already concerned by a recent drop in investment by foreigners in US Treasury bonds and foresee circumstances in which interest rates rise sharply, reducing capital spending and triggering home-price deflation.

    With federal deficits already running so high, it is unclear how Bush will pay for his first, let alone his second-term agenda, a potentially multi-trillion-dollar array of plans. John Lonski of Moody's Investment Services says there is a danger that the administration's fiscal policy could lead to a broader loss of confidence in the Federal Reserve's monetary policy. 'The fed fears that if it confronts inflation risks too aggressively, it could puncture the home price bubble.'

    Despite the larger economic worries, US business has tended to welcome Bush's re-election. The Dow climbed on the news, expecting further deregulation in such sectors as telecommunications, utilities and coal mining. Drug companies expect to see their patents extended and to receive protection from plans to import cheaper drugs from Canada. Further, the dashing of Kerry's plans to raise the minimum wage, force Detroit car-makers to improve petrol consumption, and prevent oil and gas drilling on protected lands, have pleased Wall Street.

    Economists' fears of brewing trouble are shared by many Americans who, after three years of apparent economic recovery, no longer believe the economy is improving. A 'consumer comfort' poll by Money magazine found that 42 per cent of Americans surveyed said the economy was still getting worse.

    But four days after his victory, President Bush has shown little serious interest in assuaging Wall Street's fear of the deficit. While Bush has promised not to raise taxes under the guise of tax code simplification and to cut the budget deficit in half by 2009, even a minor slowdown in growth will make deficit reduction targets all but impossible to meet.

    Further, with a clear majority of the popular vote and Republican control of both Houses of Congress, the President is under no political obligation to meet his commitment to reduce it.

    With no room to trigger growth with tax cuts and interest rate cuts, the projections of 3.4 per cent growth in 2006, 3.3 per cent in 2007 and 3.2 per cent in 2008 depend on manufacturing and capital investment, not the consumer-led spending that lifted the economy out of recession three years ago and has sustained it since.

    But even firms that would seem to benefit from Bush's re-election and the neo-con doctrine of perpetual war are not overly optimistic. Defence contractors fear that the budget deficit and costs of the war in Iraq could soon force the Pentagon to cut the proportion of its $417 billion 2005 budget assigned to the development of new weapons systems.

    Others say the US economy is in better condition now than it was when Bush took office in 2000. Then, the economy had already slid into recession, the stock market had tanked and unemployment was rising. Currently, unemployment is 5.4 per cent compared with 6.3 per cent in 2003, and inflation remains low.

    The US economy created a million jobs this year - better than last year, but, according to JP Morgan's Chan, hardly stellar. 'Are we doing better than we were? Absolutely. But at this stage of the expansion we should have created 6 million jobs.'

    Any perception that Bush enters his second term in office with the will to make the hard decisions that would begin to bring down the deficit, shore up social security in preparation for the retirement of the baby boom, and enact an energy policy that goes beyond military intervention in the Middle East and drilling in Alaska, is hard to find.

    Lonski predicts that a weakening dollar, manufacturing investment, and stronger exports could lead the recovery - or at least boost Wall Street and corporate America profits. 'Further depreciation of the dollar can only improve the outlook for profitability in the months ahead,' he says. All right for some, then.

 
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