December 2, 2004


Economic reality check (Larry Kudlow, December 2, 2004, Townhall)

As usual, the optimists' list is way longer than the pessimists'. Core inflation is coming in around 1.5 percent. Business equipment and software ("cap-ex" as it is known on Wall Street) grew by 17.2 percent last quarter, while consumers spent at a 5.1 percent pace. Meanwhile, U.S. trade is very healthy. Exports rose by 6.3 percent at an annual rate, while imports increased 6 percent. New jobs are running near a 200,000 monthly pace. Unemployment, at 5.5 percent, is historically low.

The dollar? If certain officials at the Federal Reserve will stop bad-mouthing it, we'll wake up one of these days with a 15 percent dollar rally. Why? Because President Bush's pro-growth fiscal policies will restrain spending and reduce tax rates, especially on saving and investment. Higher after-tax investment returns will attract foreign capital from all over the world. If you haven't noticed, Japan's economy is slumping again. Europe's economy never recovered in the first place. And fast-growing China and India are becoming our best export customers. The dollar is way undervalued in this environment.

However, if you truly want a balanced trade account in the United States, the most effective but demoralizing way to achieve it is to induce recession with rising tax rates and excessive Fed monetary restraint. The trade accounts were balanced in the early 1980s and the early 1990s because of recession -- but this was reflected by a total collapse of U.S. imports, jobs and just about everything else. Recessionary policies would be lunacy today. America's trade gap is itself a sign of prosperity. Our economy is rising, while other industrial economies are not.

Why The Dollar Is Giving Way: The problem: America's yawning deficits -- and foreign investors' waning interest in financing them (Business Week, 12/06/04)
The renewed drop already has led to heightened transatlantic tensions. European Central Bank President Jean-Claude Trichet, worried that the strengthening euro could undercut the region's fragile recovery, has called the currency's rise against the dollar "brutal." German Chancellor Gerhard Schröder agrees. "The euro-dollar rates are a cause for concern," he told reporters in Berlin on Nov. 20 before an address to Snow and other economic policymakers from the Group of 20 nations. "The cause is clear," he added. "It can be found in the double deficit in the U.S. -- the deficit in the federal budget and the current account."

Snow disagrees. He pins much of the blame for the gaping U.S. trade shortfall on what he calls a "growth deficit" in the rest of the world, especially in Europe. In the third quarter, growth slowed to a virtual standstill in Germany and France. He wants Europe to reform its product and labor markets and boost its economies so it can buy more imports from the U.S. and elsewhere.

At the heart of the dollar's difficulties is the ballooning U.S. current account deficit and the growing wariness on the part of foreign investors and central banks to finance it. Thanks in part to sky-high oil prices, the U.S. deficit looks on course to hit a record $600 billion this year. At close to 6% of America's gross domestic product, that's up from $496.5 billion last year and $421.7 billion in 2002.

My math isn't so good, but I think $600 billion would be 6% of $10 trillion, no? While our GDP for 2004 will be $12 trillion or $1.5 trillion higher than it was in 2002 or 20% higher than it was for the first year of the Bush presidency? At any rate, isn't $600 billion significantly less than 6% of $12 trillion?

Eurozone economy hit with flood of bad news (AFP, 01/12/2004)

The eurozone economy got slapped with a wave of bad news Wednesday that highlighted a third-quarter slowdown, a decline in industrial activity and a stagnant job market.

The reports came as sources close to the European Central Bank said the ECB had lowered its growth forecast for the eurozone this year to 1.8 percent from a previously projected 1.9 percent, and to 1.9 percent from 2.3 percent in

In the third quarter, output in the 12 countries using the single European currency slowed to 0.3 percent from 0.5 percent in the second and 0.7 percent in the first, the European statistics institute Eurostat said. [...]

The gloom deepened with a report that industrial output, as measured by a purchasing managers' index, plunged two points in November to 50.4.

In two of the largest eurozone economies, Germany and Italy, the manufacturing index fell below 50, marking a contraction in industrial activity.

"Eurozone industry is in near-stagnation," said Emmanuel Ferry of Exane BNP Paribas, citing "external factors such as a strong euro, expensive oil and lower world demand."

The surging euro, which crept up to a record 1.3336 dollars on Wednesday, dampens exports and acts as a drag on economic momentum.

Warned Mark Wall of Deutsche Bank: "The manufacturing sector could fall into recession if current trends persist."

Posted by Orrin Judd at December 2, 2004 9:28 AM

No, the gap is from 720B to 600B, not significant: 5% vs. 6%.

Posted by: JimGooding at December 2, 2004 10:11 AM

Excellent economic numbers come out for the US this week. Dollar falls. Bad numbers for the EU come out. Dollar falls. What the hell is going on?

Posted by: Bob at December 2, 2004 11:06 AM

George Soros and his gang workin' hard.

Posted by: ed at December 2, 2004 11:10 AM

Well, they have to recoup their losses from Nov. 2.

But, in a race of currencies, the EU doesn't stand a chance.

Posted by: ratbert at December 2, 2004 11:24 AM


Currency rates are 50% psychological, 50% Central banks. If the EU Central bankers are willing to destroy their economies in order to pretend that the euro is better than the dollar we can laugh all the way to the shopping mall.

Posted by: oj at December 2, 2004 11:30 AM

It was suggested somewhere below I think that the dollars fall is party strategy on our part to destroy the Euro and to force China to float their currency against the dollar.

Posted by: AML at December 2, 2004 11:37 AM

I like the part where the Euros swallow their pride and start scoffing up the great buys on Wall Street with their overvalued Euros, if it hasn't already begun.

Moving their major plants over here would solve some of their labor problems as well. Any wonder they don't really like us.

Posted by: genecis at December 2, 2004 12:21 PM

Indeed it seems the dollar continuing to plumb these levels isn't realistic or even sustainable for long. BTW, for those of you so inclined to take the other side of Soros's funny business, you may put your money where your (keyboard) is at (disclaimer: not advice, just stating facts).

Posted by: John Resnick at December 2, 2004 12:23 PM

I remember the Euros yammering in the mid-80s and beyond - it's always our fault, never theirs.

Posted by: Sandy P at December 2, 2004 1:36 PM

Does Kudlow really think Japan is sliding into decline again? All the reports I have seen in the past several months say otherwise - even if the 'recovery' is modest.

Posted by: jim hamlen at December 2, 2004 2:05 PM

Bob: That's not inconsistent at all. The problem is that "falling" sounds bad, so we treat it as bad news.

But, still, anytime spent thinking about exchange rates is time wasted.

Posted by: David Cohen at December 2, 2004 2:44 PM