Global View: 2005, waves or seismic shifts
Published: Dec. 31, 2004 at 7:41 PM
By IAN CAMPBELL
United Press International
The year 2004 has come to an end blighted by a natural disaster of staggering proportions. We are reminded of our fragility before nature. And fragility might be the notion to keep in mind as we look ahead to 2005.
The world economy, a man-made construct, has its waves lapping peacefully on the beach and, below, its tectonic plates: the big shifts which, at various times, shake the earth, throw up huge waves and reveal that tall towers have foundations of sand. Precisely when the shift comes is impossible to say. Yet our sense is that it is close at hand.
In the U.S. economy that dominates the global outlook the risks of seismic shift are much discussed. For when economists talk of the dangers presented by huge twin decifits it is violent correction that they fear. But before we go deeper, to the global economy´s plates, let us gaze at its surface and the reassuring, glittering waves.
For a time at least in 2005 the waves are going to carry on lapping peacefully and invitingly. Manufacturing surveys from the New York and Philadelphia Federal Reserve Banks have shown a jump in activity--to the highest level since July."Builders have every reason for good cheer this holiday season," said National Association for Home Builders' President, Bobby Rayburn, in mid-December after the NAHB´s homebuilders survey reached 71, its highest level for the year.
The builders knew something. Thursday the National Assoiciation of Realtors reported that existing home sales rose to an all time monthly record in November, breaking the previous recrod set in June. The pace of sales, at an annualised rate for the month of 6.94 million units, was 13.2 ercent up on November 2003. The national median existing-home price was $188,200 in November, up 10.4 percent from November 2003. The number of existing homes sold this year has already surpassed the record of 6.1 million sold in 2003.
All of these are dazzlng numbers. At the end of yet another booming year for the U.S. housing market, the news has become still more positive. And those in the market expect the happy waves to keep on rolling in. David Lereah, the National Association of Realtors' chief economist, said "Our forecast for the housing market (in 2005) is for a continuation of strong home sales, although down a little from the record-setting pace of 2004."
We dwell on the U.S. housing market because it, more than anything else, has helped to keep the U.S. economy and even the world one sunny in the past few years.
If we look back at the U.S. ecnomy over the past decade or so, these are the trends that emerge. From the recession of the early 1990s the economy, rebalanced by George Bush senior from Ronald Reagan´s record deficits, began to grow strongly and healthily -- under a new president, Bill Clinton. And the Clinton expansion went on and on. The usual cyclical slowdown in the economy was skipped. The reason was that the late 1990s´ boom in the stock market poured money into Americans´pockets and demand into the world economy.
In 2000 the stock boom ended and in 2001 the U.S. economy flirted with recession. The remedy chosen by President George W. Bush and Federal Reerve Chairman Alan Greenspan was tax cuts, interest rate cuts and a resultant new asset price boom: in house prices. That boom, as we have seen, has not yet ended. It continues to surprise.
The question is for how much longer? And what the housing boom´s legacy will be given that the legacy of the stock boom has proven so negative, obliging the U.S. government and the Federal Reserve to resort to extreme policies just to avert marked slowdown, or even deflation.
It might be argued that this interpretation of the economy´s path in recent years ignores another more positive factor, one that has come, for most Americans, in the guise of an enemy: the rise of Asia, and especially China. Many Americans have complained of jobs lost to China and India. But China´s rapid growth and booming demnd for goods and services has also created fresh opportunity and growth in the wider world. China promises much: a new wind to assist the world economy to sail ahead in decades to come. But, in our view, not before an unhappy period in which a seismic shift occurs.
It is beneath the U.S. economy that the plates must shift some time soon--perhaps in 2005. The pressures are building. The tumbling dollar is a warning: smoke rising from the earth.
The United States´ colossal and still climbing trade deficit and its very big fiscal deficit are signs that America has lived beyond its means not just for a short period but for a long one. Both government and American households have taken on more and more debt in a manner that has to end badly.
And it is not just bearish economists, such as this one, that says it. So does the Accounting Office of the U.S. Government. In mid-December the GAO issued a report in which it put the United States´ long-term liabilities and commitments are huge at $46 trillion, which is about four times the size of the nation´s gross domestic product and equal to $350,000 for each U.S. worker, according to the GAO´s calcluations. The United States is running up growing social secutiry, and, still worse, Medicare commitments for which it has not provided funding. The GAO warns that if corrective action is not taken, the U.S. ecoomy could be crippled by its debts.
The scope to increase debt and put off paying for consumption now--whether it be speding on a new car, a prescription drug benefit, or war in Iraq--is simply running out. There can be no fresh stimulus for the economy from more tax cuts funded by extra debt. And, even though housing continues to bubble, its ability to provide extra spending money from mortgage refinancing has dropped, because long-term intrest rates, though absurdly low, are not dropping still lower.
The precipitous fall of the dollar may be the sign that the seismic shift is about to occur. Foreigners are becoming less willing to pour their money into American assets. The risk is that U.S. long-term interest rates rise. Then, suddenly, the housing market´s long party will be over and American households will at last be forced fully to fund their expenditure.
That seeismic shift may come in the second half of 2005. If it does, the U.S. dollar will fall still further and be joined by American bonds and the stock market. The surprisingly calm waters of the past three years will be suddenly and violently disturbed. Recession will be inevitable. After so many years of falsely constructed tranquillity, recovery will take years to come.
It is a time to be cautious. The economic waves are far less safe than they seem.
--
Global View is a freelance column reflecting on issues of importance for the global economy. Comments to icampbell upi.com.
United Press International
The year 2004 has come to an end blighted by a natural disaster of staggering proportions. We are reminded of our fragility before nature. And fragility might be the notion to keep in mind as we look ahead to 2005.
The world economy, a man-made construct, has its waves lapping peacefully on the beach and, below, its tectonic plates: the big shifts which, at various times, shake the earth, throw up huge waves and reveal that tall towers have foundations of sand. Precisely when the shift comes is impossible to say. Yet our sense is that it is close at hand.
In the U.S. economy that dominates the global outlook the risks of seismic shift are much discussed. For when economists talk of the dangers presented by huge twin decifits it is violent correction that they fear. But before we go deeper, to the global economy´s plates, let us gaze at its surface and the reassuring, glittering waves.
For a time at least in 2005 the waves are going to carry on lapping peacefully and invitingly. Manufacturing surveys from the New York and Philadelphia Federal Reserve Banks have shown a jump in activity--to the highest level since July."Builders have every reason for good cheer this holiday season," said National Association for Home Builders' President, Bobby Rayburn, in mid-December after the NAHB´s homebuilders survey reached 71, its highest level for the year.
The builders knew something. Thursday the National Assoiciation of Realtors reported that existing home sales rose to an all time monthly record in November, breaking the previous recrod set in June. The pace of sales, at an annualised rate for the month of 6.94 million units, was 13.2 ercent up on November 2003. The national median existing-home price was $188,200 in November, up 10.4 percent from November 2003. The number of existing homes sold this year has already surpassed the record of 6.1 million sold in 2003.
All of these are dazzlng numbers. At the end of yet another booming year for the U.S. housing market, the news has become still more positive. And those in the market expect the happy waves to keep on rolling in. David Lereah, the National Association of Realtors' chief economist, said "Our forecast for the housing market (in 2005) is for a continuation of strong home sales, although down a little from the record-setting pace of 2004."
We dwell on the U.S. housing market because it, more than anything else, has helped to keep the U.S. economy and even the world one sunny in the past few years.
If we look back at the U.S. ecnomy over the past decade or so, these are the trends that emerge. From the recession of the early 1990s the economy, rebalanced by George Bush senior from Ronald Reagan´s record deficits, began to grow strongly and healthily -- under a new president, Bill Clinton. And the Clinton expansion went on and on. The usual cyclical slowdown in the economy was skipped. The reason was that the late 1990s´ boom in the stock market poured money into Americans´pockets and demand into the world economy.
In 2000 the stock boom ended and in 2001 the U.S. economy flirted with recession. The remedy chosen by President George W. Bush and Federal Reerve Chairman Alan Greenspan was tax cuts, interest rate cuts and a resultant new asset price boom: in house prices. That boom, as we have seen, has not yet ended. It continues to surprise.
The question is for how much longer? And what the housing boom´s legacy will be given that the legacy of the stock boom has proven so negative, obliging the U.S. government and the Federal Reserve to resort to extreme policies just to avert marked slowdown, or even deflation.
It might be argued that this interpretation of the economy´s path in recent years ignores another more positive factor, one that has come, for most Americans, in the guise of an enemy: the rise of Asia, and especially China. Many Americans have complained of jobs lost to China and India. But China´s rapid growth and booming demnd for goods and services has also created fresh opportunity and growth in the wider world. China promises much: a new wind to assist the world economy to sail ahead in decades to come. But, in our view, not before an unhappy period in which a seismic shift occurs.
It is beneath the U.S. economy that the plates must shift some time soon--perhaps in 2005. The pressures are building. The tumbling dollar is a warning: smoke rising from the earth.
The United States´ colossal and still climbing trade deficit and its very big fiscal deficit are signs that America has lived beyond its means not just for a short period but for a long one. Both government and American households have taken on more and more debt in a manner that has to end badly.
And it is not just bearish economists, such as this one, that says it. So does the Accounting Office of the U.S. Government. In mid-December the GAO issued a report in which it put the United States´ long-term liabilities and commitments are huge at $46 trillion, which is about four times the size of the nation´s gross domestic product and equal to $350,000 for each U.S. worker, according to the GAO´s calcluations. The United States is running up growing social secutiry, and, still worse, Medicare commitments for which it has not provided funding. The GAO warns that if corrective action is not taken, the U.S. ecoomy could be crippled by its debts.
The scope to increase debt and put off paying for consumption now--whether it be speding on a new car, a prescription drug benefit, or war in Iraq--is simply running out. There can be no fresh stimulus for the economy from more tax cuts funded by extra debt. And, even though housing continues to bubble, its ability to provide extra spending money from mortgage refinancing has dropped, because long-term intrest rates, though absurdly low, are not dropping still lower.
The precipitous fall of the dollar may be the sign that the seismic shift is about to occur. Foreigners are becoming less willing to pour their money into American assets. The risk is that U.S. long-term interest rates rise. Then, suddenly, the housing market´s long party will be over and American households will at last be forced fully to fund their expenditure.
That seeismic shift may come in the second half of 2005. If it does, the U.S. dollar will fall still further and be joined by American bonds and the stock market. The surprisingly calm waters of the past three years will be suddenly and violently disturbed. Recession will be inevitable. After so many years of falsely constructed tranquillity, recovery will take years to come.
It is a time to be cautious. The economic waves are far less safe than they seem.
--
Global View is a freelance column reflecting on issues of importance for the global economy. Comments to icampbell upi.com.
© 2004 United Press International. All Rights Reserved.
This material may not be reproduced, redistributed, or manipulated in any form.
This material may not be reproduced, redistributed, or manipulated in any form.
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