Benson's Economic
& Market Trends
Why the World Loves America's
Deficits
Mirror, mirror on the wall...
Richard Benson
Archives
January 13, 2005
At the end of last year, the
nation's financial deficit - what the United States owes the
rest of the world, minus what the rest of the world owes the
United States - amounted to more than $3 trillion, and it's still
growing. This account deficit means the United States imports
more than it exports. To fill the gap - and its budget deficit
- it borrows heavily. However, while the trade deficit weakens
the dollar, it strengthens the world! For Europe, Japan, China,
and even America, as long as the nation's trade and budget deficits
continue to grow and are financed by the world's central banks,
everyone seems to win! Let me explain.
Let's take The European Central
Bank "ECB" as an example. The ECB is the central bank
for Europe's single currency, the euro. Their main task is to
maintain the purchasing power of the euro and thus price stability
in the euro area. The euro area comprises the 12 European Union
countries that have introduced the euro since 1999. The ECB needs
to be able to "place their paper" at a reasonable cost
when they borrow, the same way any corporation that borrows would
have to do. Given the fact that Germany and France are having
a horrendous time keeping their budget deficits below three percent,
and Greece is regularly "cooking their books" and running
six percent budget deficits, you would wonder who in their right
mind would be interested in putting their cash in sovereign euro
debt.
The current account deficits
- the broad gap between exports and imports of goods and services
- are mushrooming out of control so much so that on a relative
basis, they almost make the euro look good on an absolute basis.
In 1999 when the euro was introduced, there was great fear that
it might fall apart. Sure, the Europeans hate the weak dollar
and the fact that the Americans and Chinese are competing with
unfairly low prices. But for now, making the euro a rival to
the dollar as a world reserve currency is more important! As
the euro is being firmly established, European countries and
businesses can borrow at subsidized rates because of the pressure
to get out of the dollar. Inflation in Europe is also lower and
oil is relatively inexpensive. Euro pride can run high!
Another example is The Bank
of Japan's buying of limitless amounts of United States' treasury
and agency securities. This has allowed Japan to run their printing
press much faster than they could otherwise without suffering
embarrassment. Japan's budget deficit is approximately seven
percent, which makes the United States look fiscally responsible
in comparison! In 2005, Japan will have about $240 billion worth
of fresh Yen bonds to sell to finance their government deficit
but very few people will want to buy them with interest rates
there at almost zero. When Japan is buying dollars to hold down
the Yen, no one thinks twice about the extra monetization. What's
more important, is the fact that as long as the world thinks
there is money to be made from dumping the dollar against the
Yen, speculators and gullible investors will buy the hundreds
of billions in new government debt Japan has to place. (In reality,
Japanese fiscal policy remains bankrupt.) In addition, Japan
gets to build up massive dollar credits it can use in the future
so it can continue to attack and destroy industries, such as
the American Auto Industry (GM just announced another seven percent
cut in U.S. jobs). Of course, the Japanese would like to keep
their foreign exchange reserves safe, but funding their deficits
and getting American jobs is more of a priority.
The story on China is similar
to Japan, only more so. In 2004, speculating investors invested
over $95 billion in China. This cash is in addition to China's
$150 billion trade surplus last year and the massive $610 billion
in foreign currency reserves they have amassed. China is running
the fastest industrialization effort in the history of the world
using classical "mercantilist trade policies." A greatly
undervalued Yuan is pegged to the dollar. These speculating investors
may never get a return on their money, much less a return of
their money, but they are confident they can't lose as the Yuan
will have to revalue against the dollar. Don't hold your breath.
(Obviously, these investors have never read history; even recent
history!)
China has been winning the
economic war against America as our factories are closed down
and relocated there. Just like the Japanese, China would like
to keep their foreign exchange reserves safe. However, for now,
with the dollar going down against the euro and the Chinese Yuan
fixed to the dollar, the Chinese government can begin their "big
push to collapse and replace European industry" after helping
to reduce American production to a meager 45 percent of our nation's
consumption. China has recently witnessed worker riots, so getting
Western jobs remain the number one priority just to keep a lid
on the domestic, political situation. Clearly, one of the most
important things for the Bush Administration to focus on is getting
foreign central banks to finance a major portion of our budget
and trade deficits. In the first nine months of 2004, foreign
central banks purchased $315 billion of our financial assets.
This is equivalent to about three-quarters of the U.S. trade
deficit, and more than enough to pay for the war in Iraq. Temporarily,
this central bank buying of dollar assets holds down our interest
rates and keeps our economy in a housing boom, with false prosperity
and no savings. Our government seems to have decided that as
long as our country is the military superpower, the strategy
of exporting troops to the Middle East and jobs to Asia - in
exchange for a lock on the oil reserves and cheap imports - remains
more important than rebuilding American industry.
So for now, all the major countries
seem to "win" (as their central banks print up new
money to finance our trade deficit) because (i) the euro is secure;
(ii) Japan can finance a seven percent deficit; (iii) China gets
everyone's jobs; (iv) America gets its war paid for; (v) every
major country gets financed, and (vi) all the produced goods
get sold with that last $600 billion bought by Americans on credit.
Perhaps things will change as inflation bursts out into the open
and exposes the fraud of prosperity through printing money. Or,
at some point, central banks may discover that not only do they
need to finance new U.S. debt being created but all the old debt
as well, as the private sector dumps their dollars en masse.
This would surely put into question the seemingly limitless dollar
asset buying spree of the world's central banks.
For the future, however, Bush's
wish list, led by the privatization of Social Security and a
reform of the tax code, seems to leave little space for policies
that would reduce our country's deficits. Greenspan, himself,
in a speech to German bankers recently warned that "foreigners
would probably demand higher interest rates and bond yields to
hold American debt." The real question may be "when
does the debt become so big that foreigners begin to worry about
getting their money back with a reasonable return?" With
America taking the short-term economic view, and Asia taking
the long-term economic view, the future will prove very interesting.
The losers in all this will surely be those who want to save
in dollars, insist on holding investments denominated in dollars,
and Americans who would simply like a job working in the most
efficient and productive factories in the world, rather than
sit back and watch them be built, with the latest technology,
half a world away. Unfortunately, since most Americans will continue
to use dollars, you can guess who's going to be the big losers
here - just look in the mirror!
January 12, 2005
Richard Benson
Archives
President
Specialty
Finance Group, LLC
Member NASD/SIPC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480
1 800-860-2907
eMail: rbenson@sfgroup.org
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321gold
Inc
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