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Generational Dynamics Web Log for 22-Nov-04
Alan Greenspan's blunt warning raising international concern

Web Log - November, 2004

Alan Greenspan's blunt warning raising international concern

Newspapers around the world are headlining their business sections with the news that Greenspan has come closer than ever before to predicting that the American economy is possibly close to suffering a painful "adjustment."

This followed on the heels of November 17 statements by Treasury Secretary John Snow in London that America would not attempt to strength the dollar in international markets, at a time when the dollar is already at historically weak levels.

In his speech Friday to the European Banking Congress in Frankfurt, that the "current accounts deficit" (American debt level to other countries) has "risen to more than 5 percent of GDP," and "cannot continue to increase forever in international portfolios at their recent pace."

The current accounts deficit continues to widen because the American economy imports far more goods than it exports, forcing the U.S. to borrow heavily from other countries, especially Asian economies. This has weakened the dollar relative to other currencies, and encouraged widespread currency speculation, especially in China. Greenspan's warning is that these countries will not continue to loan money forever, and that an adjustment may come sooner than expected.

The French news agency Agence France-Presse (AFP) says, "Snow, Greenspan dash hopes for relief from weak dollar."

The UK Guardian headline reads, "US risks a downhill dollar disaster." The BBC says much the same thing, though adds, "[Greenspan] is not predicting certain catastrophe now or indeed at any stage in the future. But the implication is clear, that the inevitable adjustment might come in a disruptive form."

What's new is this level of negative comment.

As I wrote before the Presidential election, many negative comments were being muted until after the election. For example, Greenspan's and Snow's statements would both have been impossible before the election, since either would have become a campaign issue. Now that the election is over, it's possible to report a drop in the value of the dollar as if it were a weather report.

However, it's not just comments but also actions that are changing following the election. China's President Hu Jintao has promised to revaluate the Yuan, albeit slowly, a move which would accelerate the fall of the dollar.

However, Monday's Wall Street Journal reports that a wave of revaluation is spreading around Asia.

According to the article,

"Asia appears to be in the early stages of a regionwide currency revaluation, partly in anticipation that China will let its own currency float higher over the next year.

From Tokyo to Seoul to Singapore, some investors are buying up large volumes of Asian currencies, a strategy that assumes Asian countries will tolerate somewhat stronger currencies in the year ahead. The won is trading near its highest level against the dollar in seven years, while the yen is up nearly 7% since the beginning of October.

Investors also are pouring capital into Asia's equity and bond markets -- a bet that appreciating currencies will boost the value of their assets over time. Meanwhile, a number of Asia's largest companies are drafting strategies to deal with current and anticipated adjustments in Asian currencies, including cutting costs and changing the amount of business they do in dollars."

A large revaluation of Asian currencies would have a big impact in America, since imported products would become much more expensive, forcing Americans to cut back. Since many analysts are predicting a recession next year anyway, thanks to high oil prices, this kind of revaluation would make a recession even worse, and force a harsh "adjustment" of the kind that Greenspan is raising warnings about.

From the point of view of Generational Dynamics, an "adjustment" could be quite severe. Stocks are overpriced by a factor of 100%, according to standard price/earning ratio measures that were commonly used by financial managers two decades ago. Investors stopped using price/earnings ratios when these measures stopped giving answers that the investors wanted to hear.

The purpose of Greenspan's warning was to shock the Administration and the Congress into reducing spending. In earlier warnings, Greenspan warned about "abrupt and painful adjustments" unless changes were made to reduce Social Security and Medicare benefits quickly.

All of this is politically impossible of course. The Republicans will never agree to roll back the tax cuts, and the Democrats will never agree to reducing Social Security or Medicare benefits. Any attempt to bring about these changes will trigger a bitter political battle, as the nation undergoes a major cultural and political restructuring.

Generational Dynamics predicts that America has entered a 1930s style Great Depression, and that stock prices will fall by 50% or more, when something happens to trigger a loss of confidence. Based on the current accounts deficit, and high level of dangerous international conflict, Greenspan's warning about a serious "adjustment" may be well on its way to coming to pass. (22-Nov-04) Permanent Link
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Generational Dynamics Web Log for 22-Nov-04 Alan Greenspan's blunt warning raising international concern

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Generational Dynamics Web Log for 22-Nov-04
Alan Greenspan's blunt warning raising international concern