Replies to post #482143 on Zeev's Turnips Patch-No Politics (ZEEV)

[marketmaven]

Fmr Treas Sec Summers Says "AVOID TREASURIES!"

Summers Sees Account Deficit as Global Threat: John M. Berry
http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_berry&sid=awlqilGmBC5s

June 22 (Bloomberg) -- Former Treasury Secretary Lawrence H. Summers said last week that the $800 billion U.S. current account deficit represents a risk to the global economy and that if its decline isn't carefully managed, it could lead to a world recession.

Summers, a brilliant economist who has resigned the presidency of Harvard University effective the end of this month, made his remarks at a Boston Federal Reserve Bank conference on global imbalances on Cape Cod, Massachusetts.

In contrast, several of the other conference speakers, including Harvard economist Richard N. Cooper and economist Peter Garber of Deutsche Bank, portrayed the deficits as relatively benign.

And a large majority of the roughly 75 economists and academics present indicated by a show of hands that they expect the current account deficit eventually to shrink smoothly to a sustainable level.

With no sign of strain from financing the deficit last year, or the cumulative $4 trillion over the past 10 years, there was also broad agreement that the big short-fall in transactions with the rest of the world may continue unabated for years to come.

Summers was skeptical about both the smoothness of the adjustment and its timing.

In recent years, numerous economists have predicted the foreign investors and central banks whose purchases of U.S. stocks and bonds, direct investments in companies and bank loans have financed the current account deficits would become reluctant to continue doing so. That could have forced up interest rates and caused the deficits to decline.

That hasn't occurred, of course, and now some of those economists are wondering if it ever will.

The `Towel'

Summers labeled that thinking the ``throw in the towel theory.''

``Since the conventional view hasn't been right, that's evidence that view is wrong,'' or so that argument goes, Summers said. To the contrary, there's ``more risk now'' than previously that a crisis could erupt, he said.

On June 15, the Boston Federal Reserve Bank's president, Cathy E. Minehan, asked how many of the participants expected a smooth correction of the deficits at some point. So many hands went up that she didn't ask who disagreed.

The next day, the bank's research director, Jeffrey C. Fuhrer asked how many thought there was at least a 10 percent to 20 percent probability that a financial crisis would force the adjustment to occur. A similarly large majority held up their hands to that as well.

I put the probability of something going wrong much higher than 20 percent because so many things have to happen to avoid a crisis.

Pain Ahead

Either way, smooth or rough, American households are going to feel a lot of pain when the adjustment does occur. It isn't going to be much comfort either that the pain elsewhere, particularly in Europe, is likely to be worse.

The U.S. is consuming and investing more than it is producing, with the rest of the world making up the difference with a flood of imports paid for with foreign capital. For the current account deficit to shrink, U.S. savings have to rise and consumption will have to fall.

Summers derided as an ``enduring fallacy'' the notion that a country can decide to save more, have its current account deficit improve and maintain good economic growth while nothing else happens.

``If the current account deficit falls, something else has to change,'' Summers said. Exports have to rise, or imports will have to fall, and if U.S. savings were increasing, ``there would be a decline in global aggregate demand'' unless growth increased elsewhere in the world, he said.

In the late 1980s, the last time the U.S. current account deficit declined notably, consumption was little changed for three years while the value of the dollar fell sharply and more goods and services were sold abroad.

The Causes

Obviously something of that sort will have to happen again, only the current account deficit now, at 6.4 percent of gross domestic product and rising, is twice as big as it was then. And U.S. household saving is much lower than then.

Economist Catherine L. Mann of the Institute for International Economics pointed out that essentially all of the increase in the current account deficit in recent years has been due to deepening deficits in trade in motor vehicles, consumer goods and energy.

Trade in capital goods and industrial materials is balanced and there is a small surplus in services, Mann said.

Government Policies

Several papers presented at the conference provided convincing evidence that the U.S. current account deficit isn't just the product of over-consumption by Americans. Economic circumstances and government policies in many other parts of the world have played a major role as well.

The extraordinarily high savings rate in China and a number of other countries has provided a huge amount of capital to be invested elsewhere. By keeping its currency peg at a relatively low value to the U.S. dollar, the People's Bank of China, its central bank, has accumulated an enormous amount of dollars, much of which it has used to purchase U.S. Treasury securities.

Several other East Asian countries also maintain currency pegs that have required them to accumulate dollars. And with oil priced in dollars, so have many of the oil exporting nations.

The flow of capital has kept inflation-adjusted interest rates low, which has encouraged both consumption and a housing boom in the U.S.

Were the U.S. current account deficit to begin to shrink, the surpluses in other countries -- including some in Europe -- would have to shrink as well.

As Summers put it, ``What happens in the rest of the world is probably more important in the resolution of this than what happens in the U.S.''

No one at the conference had a clue as to what might happen to cause the deficit to begin to shrink, which is another reason to wonder whether it may be a financial crisis. In the meantime, the deficit is still headed higher.

(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)


To contact the writer of this column:
John M. Berry in Washington at [e-mail]

[butterfly111]

PEIX, Bill Gates invested when it was around 20, right? So now Gates Crown is gone and the stock comes back to earth<g>

[MajorBottom]

GAP at 15 to fill.

LOOKS LIKE a BEAR FLAG now and we all know flags fly at HALF MAST.

I see 15 possibly on a BREAK of 20.

OR at least your 17.58 200 dma with a fill of the MAR 2006 GAP about the same.

Regards,

MB