On 15 Aug 2002 at 1:16, Hermit wrote:
> Bush defies belief
> President preaches to converted while Fed grapples with the real
> Worth noting that the $80 billion cost of a war in Iraq and the $10
> billion a year to maintain a peacekeeping force there for the next six
> years after such a war would also have a highly significant effect on
> the US deficit. (Time and money estimates from Jane's defense)
> Source: The Guardian
> Authors: Charlotte Denny
> Dated: 2002-08-15
> The world's largest Baptist university was both an appropriate and
> unfortunate location for the Bush administration to pick for this
> week's summit on the US economy. To his detractors, the choice of
> Baylor University in Waco, Texas - half an hour's drive from President
> Bush's Crawford ranch - reinforces the image of a president too lazy
> to stray far from his holiday home even for a serious issue such as
> the economic situation.
> But the relentlessly upbeat message from the summit suited Baylor's
> evangelical surroundings. Invitations to Tuesday's gathering were
> limited to true believers who spent the day energetically praising the
> administration's handling of the economy.
> Van Eure, owner of the Angus Barn restaurant in Raleigh, North
> Carolina - one of the "ordinary Americans" invited to the summit -
> told the president she backed elimination of inheritance taxes, a
> favourite White House policy. "I'm just honoured to be sitting next to
> one of my heroes," Ms Eure said.
> President Bush may have received a warm response in Waco, but he is in
> danger of going from hero to zero in the eyes of middle America. As
> their pension savings vanish amid revelations of corporate corruption,
> workers and investors are becoming increasingly pessimistic about the
> economic outlook.
> Their gloom is shared by Wall Street, where stock prices have fallen
> by a third since the dotcom bubble burst in March 2000, and the dollar
> has lost some of its shine. Economists are warning that the world's
> largest economy is in danger of a double-dip recession.
> Last month, the commerce department published revised estimates for
> growth that rewrote recent economic history. Not only was the 2001
> recession deeper and longer than first thought, but America's much
> vaunted productivity miracle has largely evaporated in the revisions.
> Hopes that the blistering pace of growth in the first three months of
> the year were a sign the economy had shrugged off last year's downturn
> proved illusory. Most of the rebound was a temporary boost from the
> turnaround in the inventory cycle. Growth slowed dramatically in the
> second quarter, with output rising by just 0.3%.
> The lukewarm recovery has so far failed to create jobs, adding to
> fears that consumer spending may falter. Battered by falling markets
> and the corporate scandals, consumer confidence fell last month to its
> lowest point since the aftermath of last September's terrorist
> Economists say the willingness of households to keep spending will be
> crucial to preventing the economy from sliding back into recession.
> With businesses still writing off billions of dollars of wasted
> investment during the dotcom boom, consumer spending is the only
> factor keeping the economy above water.
> President Bush's economic team had few serious remedies to offer this
> week. The summit seems to have been a stunt designed by political
> advisers for maximum impact on prime-time television, reinforcing the
> perception that Bush's economic officials are a second-rate bunch
> without much clout in the White House.
> Their proposals - government-backed terrorism insurance, domestic
> energy exploration and abolition of the estate tax - failed to
> reassure a market worried about far larger issues such as re-emergence
> of the federal deficit and America's ballooning trade gap.
> Thanks to last year's $1.3 trillion tax giveaway, most of which went
> to the richest 10% of the population, the White House cannot afford
> further fiscal easing to help kick-start growth. Meanwhile, foreign
> investors are pulling out of Wall Street and Main Street, putting
> downward pressure on the dollar.
> As the hand-picked audience assembled in Waco to hear US treasury
> secretary Paul O'Neill explain how the president's economic agenda
> would help "each American own part of the American dream", the US
> Federal Reserve's open markets committee was meeting. Banal slogans
> were not on the agenda; the Fed's top minds were considering whether
> the US economy is about to follow the same path as Japan.
> The world's second-largest economy has been trapped in a deflationary
> spiral since the collapse of its property market 10 years ago.
> Policymakers at the Fed are worried that the dotcom implosion could
> cause a similar bout of deflation in the US.
> Falling prices might sound like a central banker's dream but in fact
> deflation is far more damaging and harder to control than inflation.
> With prices always falling, there is no incentive for consumers to go
> out and spend - goods will be cheaper next week. The entire economy
> suffers the equivalent of a bout of negative equity. Anybody with
> outstanding loans is in trouble, because the nominal value of their
> borrowing stays the same.
> Prices in America are still rising but at their slowest rate in 40
> years and the Fed takes the threat of deflation very seriously. A
> paper by senior Fed economists published last month warns that bouts
> of deflation can surprise forecasters.
> "The failure of economists and financial markets to forecast Japan's
> deflationary slump in the early 1990s poses a cautionary note for
> policymakers in similar circumstances: deflation can be very difficult
> to predict in advance. In consequence, as interest rates and inflation
> rates move closer to zero, monetary policy perhaps should respond not
> only to baseline forecasts of future activity and prices, but also to
> the special downside risk - in particular, the possibility of
> deflation - to those forecasts as well."
> In other words, better to cut rates and risk a little extra inflation
> than let the economy slide into deflation.
> The lesson, they conclude, is that the Japanese authorities should
> have acted earlier and with greater vigour to prevent prices falling
> in the early 90s. But so far it has failed to prompt the FOMC into
> action: at its meeting this week, the committee kept rates at a
> 40-year low for the eighth month in a row.
> Two factors probably lie behind the Fed's over-cautious approach. A
> rate cut might have alarmed already nervous markets by revealing the
> extent of the Fed's concerns about the outlook.
> Fiscal laxity
> The second is that the Republican administration's lurch into deficit
> has boxed in the Fed. With fiscal policy already loose, the Fed feels
> constrained about delivering more stimulus to the economy through
> lower borrowing costs.
> The tax cut which the administration hailed as saviour of the economy
> last year now looks like a major policy error. If the recovery
> continues to be sluggish, the government cannot increase spending or
> cut taxes further to help get the economy moving without being
> punished by the markets for fiscal laxity.
> Most economists expect the Fed to cut rates later this year. However,
> the monetary authorities are running out of ammunition: with rates
> already at 1.75% there is not much more the Fed can do.
> The next few months will be a testing time for the US economy.
> President Bush may believe that the country's underlying strengths are
> greater than the challenges ahead. For his advisers, the real worry
> must be that the phrase which sank Bush senior's re-election chances -
> "It's the economy, stupid" - will prove equally damaging to his son.
Bush's tax cut (mainly for the rich) will indeed prove to be, and is
already proving to be, a gigantic budget buster, and restore the massive
federal deficits with which Bill Clinton had so skillfully dealt. No
> This message was posted by Hermit to the Virus 2002 board on Church of
> Virus BBS.
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