Friday, November 4, 2005

The economic storm is yet to come

I think Bush's low poll numbers are remarkable, in part, because the economy has not really tanked yet. Americans, politically, are remarkably narcissistic politically -- they vote their pocketbooks, and a President's popularity is ordinarily tied to the economy, stupid. If the economy does well, the President does well -- in the polls, at least.

Nixon had not just Watergate to usher him out of office, but OPEC and the Oil Crisis. Bush has managed to get below 40% approval, without high unemployment. Bush has had high gasoline prices, in addition to the Libby indictment, and gas prices probably account for more of his distress than Libby. Could things get worse?

Oh yeah, things will get worse.

Economics focus | Checking the depth gauge | "Paul Volcker, Alan Greenspan's immediate predecessor as chairman of the Federal Reserve. He recently said that he thought there was a 75% chance of a currency crisis in the United States within five years.

It is easy to see how this might happen. America's current-account deficit is running at a record 6% of GDP this year, and on existing policies it will continue to widen. America's net foreign liabilities are already 23% of GDP, and economists at Goldman Sachs calculate that this figure will reach more than 60% by 2020, even if the current-account deficit stabilises at 5% of GDP (see chart). Other countries, such as Australia and New Zealand, have sustained large external deficits for long periods, but America's borrowing is much bigger in absolute terms. It is eating up around 75% of the excess saving of Japan, China, Germany and other countries with current-account surpluses. If the dollar did not have the advantage of being the world's main reserve currency, America would already be in serious trouble. Instead, the willingness of Asian central banks to lend to the United States has allowed its deficit to keep growing for longer. Nevertheless, the deficit is unsustainable: sooner or later it will need to shrink, and that will involve a cheaper dollar."

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