[Homestead] The Piggy Bank is empty, Wall Street reacts
tvoivozd at infionline.net
Fri Sep 24 13:31:52 EDT 2004
By David Ignatius
Friday, September 24, 2004; Page A25
Wall Street is already voting in the 2004 election, and it's giving
President Bush surprisingly low marks. Despite strong corporate profits,
the Dow Jones industrial average has been stuck just above 10,000 --
trading in the same sluggish range it has maintained all year.
Reports this week by two respected economists suggest an explanation.
They argue that fiscal and monetary policies during the Bush
administration have effectively raided the nation's piggy bank to
finance current spending. Without changes in policy, they suggest, we
may be looking at an economy that continues to tread water -- or begins
• The Art Of Losing Friends (Post, Sept. 24, 2004)
• Not Another Soviet Union (Post, Sept. 24, 2004)
• Perils of an Empty Piggy Bank (Post, Sept. 24, 2004)
• Twisting the Truth (Post, Sept. 24, 2004)
• Journalism Happens (Post, Sept. 24, 2004)
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"Campaign 2004 has barely paid lip service to America's biggest economic
problem," Morgan Stanley's Stephen Roach contends in a commentary this
week. "The elephant in the room that the politicians continue to
sidestep is the profound shortfall of national saving -- the sustenance
of future growth and prosperity for any economy."
Under Bush, the federal government has burned through savings at an
incredible clip. Roach notes that the government's net savings rate has
gone from a surplus of 2.4 percent in 2000 to a deficit of 3.1 percent
at the end of July. He reckons that's the largest swing from saving to
dis-saving in the nation's history. "Little wonder that the politicians
shy away from this issue -- they are the major source of the problem,"
Households have done as miserably as the federal government at managing
money. The personal savings rate is just 0.9 percent, says Roach, and
when savings of all kinds are added together they total a net national
rate of only 1.9 percent. Roach notes that an incumbent president has
never stood for reelection with this key rate so low.
Bush's deficit spending -- doling out tax cuts and other fiscal stimuli
without the money to pay for them -- is a big part of the nation's
profligacy. But the Federal Reserve's monetary policy has also played a
role, by keeping interest rates so low during 2002 and 2003 that
homeowners were almost required to refinance their mortgages -- and in
many cases translate home equity into consumable cash.
John H. Makin of the American Enterprise Institute estimates in a Sept.
22 report that cash-out refinancings pumped $100 billion annually into
household disposable incomes in 2002 and 2003. That money helped
consumers spend far more than they were making, according to Makin, with
real consumer spending growing at 3.5 percent during the fiscal year
that ended in July even though real disposable income grew at just 1.8
percent. During the three months that ended in July, consumption roared
ahead at an annual rate of 4.2 percent while disposable income crept up
at a rate of just 0.8 percent.
This raid-the-piggy-bank approach has allowed American consumers to play
sugar daddy for the world economy. Spending down their savings,
Americans have purchased the world's goods so avidly that they have
pumped the current account deficit to a record 5.7 percent of GDP in
this year's second quarter.
"Never before has a president stood for reelection with the United
States more dependent on foreign financing of domestic growth," notes
Roach. Looking at the countries, such as China and Japan, that finance
this "increasingly tenuous disequilibrium," Roach wryly comments: "This
is the real 'coalition of the willing.' "
Wall Street knows the numbers don't add up. And investors must have
noticed this week when the head of the International Monetary Fund,
Rodrigo Rato, lectured America about its deficits as if it were a Third
World country. Thus the sluggish stock market -- despite corporate
profit rates that have bounced back to bubble-economy levels of the late
1990s. Indeed, according to Fed valuation models cited by Makin, U.S.
stocks that were trading well above "fair value" before the bubble burst
in early 2000 are now well below.
Perhaps the reason for Wall Street's torpor is that investors have
actually been following this wretched political campaign -- and noted
the vapid debate about economics. Bush and Kerry are claiming they'll
cut the budget deficit in half over the next four years, but neither is
offering convincing details. "In fact," writes Roach, "there is good
reason to worry that campaign promises of both parties could compound
the problem rather than fix it." He notes that Bush's pledge to make his
unfunded tax cuts permanent is "especially worrisome."
The presidential debate season is upon us. Maybe someone can force these
candidates to stop sweet-talking the public about economics and explain
how they plan to put some money back in the national piggy bank.
davidignatius at washpost.com
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