Global View: False dawn of 2003

By IAN CAMPBELL, UPI Chief Economics Correspondent

QUERETARO, Mexico, Dec. 26 (UPI) -- U.S. President George W. Bush will have enjoyed his early Christmas presents: Iraq's former dictator Saddam Hussein as a captive and the U.S. economy apparently liberated from its weakness of 2001-2002. This will probably be enough to win Bush re-election in November 2004. But, looking back from some future vantage point, Bush's first term is likely to be seen as the beginning of a downward slide for the United States from the euphoria of the late 1990s.

That euphoric time is not so long ago yet seems distant. Its characteristics were a fast-growing economy and rising stock-market, high investment, huge amounts of capital flowing into the United States as foreign investors sought to join the party, a strong dollar, abundant tax collection, a government surplus, a persistent consumer boom -- and immense self-confidence in the United States.


Three years on the picture looks rather different, though there are some (in fact, troubling) parallels with the heyday.

Now the economy has just managed 8.2 percent annualized growth (in the third quarter) and the stock market is at its best level for nineteen months. But capital is certainly not flooding to the United States. The Europeans don't want to know, nor do private investors in Asia, but Asian governments are keen to keep their currencies down and are buying dollar assets. This explains why the euro is soaring against the dollar while the yen is only up modestly.

Tax collection has suffered because of Bush's tax cuts and the volatility in growth and the loss of high capital gains tax revenues. At state and municipal level, too, American government is struggling financially.

There is fast growth again, albeit without creating many jobs, and the housing market has been booming as never before, permitting house-owners to refinance mortgages and draw cash from the refinancing for consumption. And here lies our biggest parallel with boom-time: the U.S. consumer, who barely paused even in 2000-2001, not cutting spending even for a quarter, is throwing his money around now.


In the second and third quarters of this year, consumer spending on durable goods rose at an annualized growth rates of 17.7 percent and 28.0 percent respectively.

Once stock options and stock gains were the American consumer's fuel, now it is inflation in something else, house prices, as well as a giveaway from a government that has no more money to give.

This has injected life not only into the U.S. economy but the world one. Around the world exports and production have tended to pick up. In the United States private investment spending, which fell in every quarter of 2000 and 2001, rose at an annualized rate of 14.8 percent in the third quarter. That helped the bulls to bellow: "the recovery is broadening out."

How could companies fail to invest when the consumer has been spending as much as he has? The real question is how much longer can the consumer ramp up spending in the manner seen in mid-2003? How many more tax cuts can he be fed? How much lower can interest rates be driven? How much higher can house prices be pushed?

The answers are simple yet widely ignored. The deficit-ridden government cannot spend (or cut taxes) more. Interest rates can't go much lower at the short, Greenspan-controlled end, nor, it would seem, at the longer-term, market-controlled end that is vital for the mortgage rate, because the government keeps issuing more and more debt and investors' willingness to buy it is not as great it was. How surprising!


That in turn means the housing boom and, more particularly, the home mortgage refinancing boom, must end. Without them, the U.S. economy and the world one will be washed up.

Come back to Bush. The economy tends to be seen with a political vision that clouds the always difficult to discern truth. Bush did not destroy the U.S. economy, as the Democrat candidates will claim in the coming months. He inherited an economy that was just beginning to run out of stock bubble steam and was about to head towards recession. (The gloomy truth from this economist is that he should have let it head there so that the U.S. economy could have cleansed itself of its bubbly qualities.) Bush's choice, however -- an understandable and popular one, of course -- was to do everything possible to end the recession as soon as possible. His tool was tax cuts, at first, and then tax cuts and defense spending, as he dealt, following the September 11 terrorism, with the terrorist threat he perceived around the world, and especially in Iraq.

But one thing should be clear. Bush's effort to revive the economy has been a no-holds-barred, "you are going to grow" one. He did not want to go into the re-election race and lose, as his father did, to a cry of "It's the economy, stupid." And now, though by November the U.S. economy is set to be ailing again, he probably won't. For in 2003 the consumer did well, enjoying the false dawn -- and the painful day when the United States must live within its means was again put off.


But that day will come. Stock gains, house price gains, tax cuts that generate a huge government deficit, mortgage debt: none of these weapons that have primed the wallet of the American consumer can keep on firing.

The end of Bush's campaign to re-ignite the U.S. economy and win re-election is not going to be pretty. With both government and consumers heavily indebted, with the stock market likely to fall and house prices also liable to do so, the economy faces many bad years. Whoever is president at the beginning of 2005 -- and it will probably be Bush -- will have no cards left to play.

Global View is a freelance column on topics of importance for the global economy. Its author wishes a Merry Christmas to all readers. Comments to [email protected].

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