The US Twin Deficits: See How they Grow

Recent news from the Iraq front can only mean that the deficit will be on the up and up. This war-related increase is already being noticed, but as Morgan Stanley's Ted Wiseman reminds us, so to is the demographic push in mandatory spending programs (like Medicare). Meanwhile as the 'soft patch' continues, tax returns go down.

As we head into the key April tax season and the budget conference committee to reconcile the different House and Senate tax and spending plans, the budget gap continues to sharply widen. Even before considering any additional fiscal stimulus, the current fiscal year budget gap already appears to be running well above our $275 billion estimate. As seen in the summary table below, in the trailing twelve months through February, the budget deficit has widened to $284 billion from the FY2002 (ending in September) deficit of $158. Tax receipts continue to fall sharply and spending to grow at a robust pace, led not only by defense but also by hefty growth in mandatory spending programs (in particular Medicare)...........

In the near term, three issues will be important in determining the ultimate FY2003 budget gap and corresponding additional Treasury supply needs -- tax refunds, nonwithheld tax receipts, and debate over additional fiscal stimulus. Of course, the pace of economic recovery will also play a key role, as will developments in Iraq. While the war has caused no clear signs of a significant immediate financing need in the Treasury's daily cash flow statements, President Bush's request for $75 billion in supplemental spending (most of which is earmarked for the current fiscal year) clearly indicates that growth of defense and security spending is likely to remain significantly elevated for some time, so there is little prospect of any relief from the spending side of the ledger.
Source: Morgan Stanley Global Economic Forum
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Stephen Roach: the Global Imbalances Mantra Continues

Stephen Roach continues to pound away at his central point: the massive instability of a US centric global economy with the US 'twin deficit'. He argues that two key changes are necessary: a US current account adjustment and 'structural reform' in Europe and Japan. Since neither of these seem likely to occur, the former at least in the short term, and the latter in any way which will impact sufficiently due to long term demographic changes, the famous 'downside risks' are clear to see. Thus Roach's vision of a dysfunctional world remaining stuck looks an all too real possibility. This scenario only seems even more likely in the light of the growing US deficit problems, the fact that 'winning the peace' may turn out to be even more difficult than winning the war (ie a sustained return of confidence doesn't look too realistic), and that the global tensions which have arisen within the G7 itself may prove to have an enduring impact on global economic collaboration.

And so it may well be that a dysfunctional world remains stuck -- unwilling or unable to uncover new sources of growth and, therefore, waiting by default for yet another kick-start from the now dormant US growth engine. But that kick may be a long time in coming. Not only does America need slower domestic demand in order to narrow its current-account deficit, but it also faces the negative wealth effects of a post-bubble hangover. Consequently, a world that waits for another shot of US-centric growth may be in for a rude awakening. In my view, the days of US-centric global growth are numbered. The time has come for the rest of the world to wean itself from the American growth engine and draw on internal sources of domestic demand. A failure to do so unmasks the true flaws of a dysfunctional world -- the inability to generate self-sustaining economic growth. America has carried the world for long enough..............

.......the war in Iraq could well spell trouble for globalization. To the extent that this conflict undermines the supra-national alliances that have long bound the world together, globalization will lack the collectivism of political support that it needs for further success. That possibility, in conjunction with the potential for trade frictions arising from a weaker dollar, a super-competitive Chinese economy, and the outsourcing of white-collar jobs to nations such as India, spells tough times ahead for globalization. Moreover, the war could well push an already weakened world economy into its second recession in three years -- an outcome that would only make matters worse for globalization. In recession, nations look inward to matters of self interest. By contrast, the look outward to collective interest that globalization requires usually comes in good times.

Ironically, the feel-good case for a “victory recovery” that financial markets are craving could also exacerbate the imbalances of a dysfunctional world. That would be especially the case if the US led the way -- not just on the battlefield but also in a restarting of the US-centric global growth dynamic. Under those circumstances, America’s current-account conundrum would only intensify. A resurgence of US domestic demand would boost imports. That would provide yet another excuse for the rest of the world to stay the course of externally-led growth and defer the reforms needed for an unlocking of domestic demand. The last thing a dysfunctional world needs, in my view, is to go back to the well of US-centric growth.

It has become conventional wisdom to believe that the war is the root cause of the perils now afflicting the global economy. I don’t buy that. In my view, an unbalanced, US-centric global economy was in serious trouble long before the war in Iraq commenced. Yes, the seemingly inevitable victory will undoubtedly unleash a sigh of relief on the confidence front. But rest assured it won’t fix what ails a dysfunctional world.
Source: Morgan Stanley Global Economic Forum
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US GDP Growth Confirms the Expected


The US economy slowed significantly in the last quarter of 2002, with consumption slowing and the job market weak according to data released this weak by the US Commerce Department. I guess we already knew all of this, but still it's nice to see our 'best guesses' confirmed.

U.S. gross domestic product rose at an annual rate of 1.4 percent in the final three months of last year after rising a robust 4 percent in the third quarter, the Commerce Department said in its final snapshot of fourth-quarter growth. For the year as a whole the economy grew a modest 2.4 percent, not enough to generate new jobs but a good bit better than the 0.3 percent gain in recession-bound 2001. The weak fourth-quarter reading on GDP which measures the value of all goods and services produced within U.S. borders -- was unchanged from a preliminary report released a month ago. Wall Street dismissed it as old news, with traders there fixated on the course of the war in Iraq. A separate report on claims for jobless benefits suggested businesses were reluctant to hire new workers with war clouding the outlook, although it hinted at some easing of labor-market strains and was not as bleak as most economists had expected. In addition, employment weakness pushed an index of national economic activity into negative territory in February and help-wanted ads in major U.S. newspaper inched lower, according to two other reports. "We sort of stand on the edge of recession," Goldman Sachs economist Jan Hatzius said, adding that the economy could tip into a slump quickly if hit by a shock. Hatzius said, however, that a sharp decline in oil prices as the United States launched military action against Iraq lessened chances of a renewed downturn. Consumer spending rose at a 1.7 percent pace in the final three months of last year, a sharp slowdown from the third quarter's 4.2 percent gain that reflected a big drop in auto sales, the Commerce Department said. In addition, exports plunged and imports rose, supplanting some domestic production. It said the widening trade gap shaved 1.59 percentage points from GDP growth.
Source: Yahoo News
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Doha Round: No Progress in Sight

Amidst all the other gloomy news, more gloom this morning from the Financial Times on Doha. Apparently their is little hope of progress on agricultural reform before the deadline. Since Europe and the United States are the main players who need to give ground, and since relations between them are not exactly at an all time high, I suppose this is fairly predictable. It does, however, raises a question as to what other 'casualties' we might find moving forward.

The Doha global trade round faces crisis as agricultural trade negotiators are expected to fail to agree reform guidelines on Monday. This threatens paralysis in the broader World Trade Organisation talks. Stuart Harbinson, chairman of the agriculture talks, said on Friday that, with WTO members unwilling to budge from opposing positions, today's deadline for setting negotiating guidelines on agricultural tariff and subsidy cuts would be missed."It is clear that no movement on key issues is possible at this stage," he said. Trade diplomats see little prospect of any early accord as the US-led war in Iraq dominates the global agenda. Launched in late 2001, the Doha round aims at agreement between the WTO's 145 members by January 2005 on issues including cutting industrial tariffs and allowing foreign companies to provide services such as insurance and telecommunications.But an overall accord hinges on a deal to slash subsidies and trade barriers in agriculture, the most heavily protected sector in global trade and the one offering the greatest potential benefits to developing countries."Europe and America should recognise that we are better as partners, not rivals, not at odds with each other but true allies creating both peace and prosperity around the world," he will tell the British Chambers of Commerce conference. "We must strengthen, not weaken our links."
Source: Financial Times
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