Zeev's Turnips Patch-No Politics (ZEEV)

[mish]

http://www.morganstanley.com/GEFdata/digests/20030425-fri.html
One of his best commentaries
snips

A sharply deteriorating federal budget position, in conjunction with Bush administration policy proposals that are now on the table, can only make matters worse as seen through the lens of America's national saving framework. The non-partisan Congressional Budget Office estimates that the President's proposals will add about $800 billion of deficit spending over the five year time frame, 2004-08. The ten-year estimate is an astonishing $2.7 trillion. In both cases, these totals are roughly double the estimated impacts of the first tax cut enacted in 1991. At the same time, budget analysts are scrambling to update their assessment of the current state of the US fiscal balance. In its March 2003 review, the CBO estimated the Bush Administration budget would produce deficits averaging about $310 billion during fiscal 2003-04 -- even after allowing for the so-called dynamic-scoring feedback effects that have long captivated supply-siders. Morgan Stanley's latest estimates are closer to $375 billion for both years, and other analysts are even less sanguine, with numbers topping $400 billion.

Federal budget deficits of this magnitude would equal about 3.5% of GDP over the 2003-04 period -- fully 1.2 percentage points larger that the shortfall hit in late 2002. Consequently, barring a spontaneous revival in private sector saving -- highly unlikely in times of economic distress -- ever-widening federal budget deficits could well be sufficient in and of themselves to all but erase the thin margin of net national saving in the United States. The likelihood of a "zero" net national saving rate -- or even a negative saving rate -- now looks to be a real possibility if Washington opts for another fiscal gambit.

The US current-account litany is every bit as worrisome as the saving saga. In the fourth quarter of 2002, the current-account deficit hit an annualized $548 billion, a record 5.2% of GDP. That surpassed the previous record of 4.5% hit in late 2000 and was well in excess of the 3.4% external gap recorded in 1987 -- the last time America was faced with a serious international financing problem. Here's where the budgetary arithmetic of saving-short US economy becomes so daunting. If, in fact, the net national saving rate now heads toward zero, the current-account deficit will have to widen sharply further, moving toward the 6.5% to 7.0% zone as a share of GDP over the next couple of years. In that case, capital inflows would have to total around $3 billion per business day. Neither the United States nor the world has ever faced an external financing burden of that magnitude.

History is clear on what to expect next. A classic current-account adjustment appears inevitable. America is on an unstable and perilous path that simply cannot be sustained. At a minimum, foreign investors will begin to exact concessions on the terms under which they provide financing for America. A weaker dollar and higher yields on Treasury securities are likely. Or the arbitrage could occur in equity or property markets. But whatever the outcome -- and I tend to favor the dollar-interest-rate correction -- there can be no mistaking the endgame. America's runaway budget deficit only compounds the external financing requirements of a saving-short US economy. It pushes both the national saving rate and the current account deficit into unprecedented zones of distress. And it leaves America plunging headlong down a most reckless path.

In the end, there's something more basic at risk, here -- the paradigm of a US-centric global economy. America's record and ever-widening current-account deficit is symptomatic of unprecedented imbalances in the US and the broader world economy. The US has consumed to excess and the rest of the world has done precisely the opposite -- perfectly content to sustain its growth by selling things to Americans. The bill for these excesses can go unpaid for only so long. Yet Washington is now upping the ante -- asking for the world to foot an even larger portion of the bill. Outsize budget deficits that spark a current-account crisis could well the tipping point that finally brings this house of cards tumbling down. It would be a policy blunder of monumental proportions.