http://www.economist.com/world/na/displayStory.cfm?Story_id=2404984
Let the dollar drop Feb 5th 2004 >From The Economist print edition Excerpt: ....Normally, when a government's budget deficit swells so fast (to 4.6% of GDP this year, from a surplus of 2.4% of GDP in 2000) and its currency is falling, investors would demand higher bond yields to compensate them for the increased risk. That penalty gives governments both a warning and an incentive to borrow less. But Asian governments are devouring American Treasury bonds with little regard for the usual risk-return characteristics. As a result, bond yields are being held artificially low, subsidising America's borrowing spree. This has allowed the Bush administration to point misleadingly to low bond yields as evidence that its budget deficit is not harming the economy, and to think that cutting the deficit is less urgent. President George Bush's plan, set out this week in his budget, to halve the deficit over five years is based on unrealistic assumptions and fantasy accounting (see http://www.economist.com/world/na/displaystory.cfm?story_id=2410569 ). A fiscal stimulus was justified when the American economy was on the brink of a deep recession in 2001, but now that the economy is booming again, borrowing needs to be cut. Asia's game In essence, Asian governments are buying American Treasury bonds in order to ensure that Americans can afford to keep spending money on Asian goods. This cannot go on forever. Despite their mercantilist instincts, sooner or later Asia's central banks will have to face the fact that they are holding far too many risky, low-yielding dollars. If they stop buying, it could trigger a sharp fall in the dollar and a jump in bond yields. Delaying the natural adjustment in the dollar and bond yields is likely to mean that, when the inevitable correction comes, it will be much more painful. .... However, America must bear much of the blame for its failure to do anything to curb household and government borrowing and so boost saving. Its easy monetary and fiscal policies are now beginning to look reckless. The dollar's slide has rightly shifted some of the burden of economic adjustment on to other economies. Sooner or later, though, America will have to face up to its own responsibilities, too. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
