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Wednesday, February 05, 2003

Hell Hath No fury Like....

Stephen Roach is angry, and you can see why:apart from anything else the budget forecast goes blithely towards the future as if there had been no bubble, and there was going to be no bubble aftermath, no 'painful readjustment process', as if the global economy was going to go forever onwards and upwards , as if there were no Japan, and no European 'Japans' in prospect. Summing up: everything is just as fine as it could be (or as someone else once said all for the best in the best of all possible worlds). In fact, he's beginning to sound like........Paul Krugman. Are we allowed no room for doubt, and where in all of this is prudency. Shouldn't we at least allow ourselves the space to consider what might be the marginally worse case scenario? As Roach says: politics normally makes for bad economics.

Rosy’s back. Yes, Rosy Scenario, that once-voluptuous stepchild of the 1980s, is now in the process of making another stunning comeback. Dressed in a cloak of overly optimistic economic assumptions and spewing forth the timeworn supply-side mantra of dynamic budget scoring, the Bush administration has brought this aging temptress back on stage for yet another encore. The movie of the 1980s is starting to run in reverse.

Federal government budgets are likely any projections -- they are only as good as the assumptions on which they rest. On that basis, alone, there’s good reason for suspicion as to the veracity of the just-released White House budget. For starters, it portrays a US economy that is about to enter the perfect path of solid growth and nonexistent inflation. Cyclical recovery is presumed to be imminent, with real GDP growth expected to accelerate to 2.9% in 2003 before jumping to a 3.6% average annual rate in 2004-05. The economy is then projected to settle back to its productivity-enhanced cruising speed of 3.2% over the 2006-08 interval. Needless to say, for a post-bubble US economy, such an outstanding and uninterrupted six-year growth outcome would be a glorious accomplishment. The average six-year growth rate of 3.3% would be only 0.5 percentage point slower than the 3.8% gains realized during the bubble years of 1995 to 2000.......History tells us that multi-year Federal budget forecasts are usually not worth the paper they are printed on.

Actually, today’s budget deficits could matter a good deal more than they did in the 1980s. That’s because America is now contemplating another multi-year fiscal stimulus with its lowest national saving rate in recorded history. In the third quarter of 2002 (latest available data), the net national saving rate -- for consumers, businesses, and the government, combined -- fell to a record low of 1.6% of GDP. This is the domestically generated saving -- after allowing for the replacement of worn-out facilities -- that is available to fund expansion in the US capital stock, the sustenance of longer-term economic growth. Reflecting this shortfall, America must borrow saving from abroad -- and run a massive current account-deficit to attract it -- in order to keep the economy growing. By way of comparison, the net national saving rate stood at 9.0% in mid-1981 on the eve of the Reagan supply-side tax cuts, more than five times the rate prevailing today..........In retrospect, it was America’s cushion of national saving that financed the Reagan tax cuts some 20 years ago. The United States has no such cushion today. Moreover, for an aging US population lacking in assets to cover the looming liabilities of retirement -- the so-called asset-liability mismatch -- a shortfall in national saving is all the more troubling.
Source: Morgan Stanley Global Economic Forum

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