us gdp slipping, inventories increasing, what now?

  1. 22,691 Posts.
    The US news was that the GDP had slipped from 4% in the third quarter to 3.1% in Oct/Dec and that inventories were rising.

    Please note that Commentators tend to deduct 1% from the GDP because of the way Greenspan has put it together, so, the GDP is actually about 2.1%. Here are the results:

    IMHO the US is in a bind from which it is difficult to extricate itself from. Consider that normally 2/3 of GDP is from consumption. That rose to 89% in July-Sept:

    Kurt Richebacker, page 20, date 13 Jan:
    The true key problem is abysmally low goods exports, accounting lately for barely 7% of nominal GDP. This compares, by the way, with a German goods export ratio of 35% of GDP".

    "In the third quarter of 2004, consumer spending accounted for 89.2% of real GDP. It is the familiar ruinous growth pattern. A viable economic recovery would require a strong contribution through sharply higher business investment and hiring. Both remain missing, although the recovery is entering its fourth year".

    Now, as consumption rises (assuming that profits are made), GDP and the Trade Deficit both rise.

    It got worse when Bush gave away that easy money which produced that consumption equal to 89.2% of the GDP.

    Now, the economy is slowing down and that could slow interest rates hikes. It is possible they wont be raised. Thus the USD won't get that kick, although with these deficits, the positive effect is limited.

    Still, imports are chugging along and so will be the trade deficit.
    The USA first didn't care about the dollar, then it wanted a strong one (Bush) and now they want a gradual decline.

    If it is too gradual (slow), then it will take too long before consumption is cut back unless China revalues but they won't be in a hurry and if they did it would be by increments, so it would take time.

    The Govt wants a slow lowering as otherwise damage to the economy could result: too rapid inflation.

    Lowering the dollar index from 130 to 83 increased the Current Account deficit. So, unless it is drastically lowered and exports of goods are increased while consumption and/or Govt costs are cut back, I can't see a solution.

    Exports of goods requires Capital Formation and a great deal of it. Sofar, Richebacher didn't see much of that, consumption took priority.


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