The U.S. Economy Sneezes

[OhioChick]

Apr. 16, 2007
The dollar takes a nosedive

The U.S. dollar hit its lowest level in two years on the world market last week. Russian citizens, who are always affected by the vagaries of the dollar's fate, should prepare themselves to see their savings in that currency lose even more value. This time, the fall was not caused by currency speculators. It was clearly the result of the weakness of the American economy.
The American problems began at the end of February, when for Federal Reserve Board chairman Alan Greenspan addressed a business conference in Hong Kong by satellite. He said that the U.S. economy has been growing rapidly since 2001, and the period of prosperity had to end some time, probably soon. “When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign,” Greenspan said. “For example, in the U.S., profit margins... have begun to stabilize, which is an early sign we are in the later stages of a cycle,” adding, “While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008.”

In 1999 and 2000, when the American economy was already growing briskly, Greenspan was concerned by the greater profits made by industry and grandiose stock quotations. He nearly told foreign investors not refrain from investing in American stocks, using the phrase “the soap bubble of the American economy.” Greenspan considered his main enemy inflation, and thought that high stock prices increased inflation. Simple investors, impressed with the value of their shareholdings, cash them in and spend the money on consumer goods, leading to price increases. He also thought that inflation went hand-in-hand with producers' high profits. If they are able to increase their profits, they have, as he said, “Power over the market.”

Now that profits have stopped rising, Greenspan should, in theory, be happy, even if it is no longer he who heads the Federal Reserve and does battle with inflation, but Ben Bernanke. The collapse of the dollar on the world market should bring him no less pleasure, since stockholders are no longer making excessive amounts of money. American stock market analysts noted that Greenspan's statements directly contradict those of Bernanke, who was saying that the U.S. economy was in good shape. On the stock market, they believed Greenspan. “Why does he bother?” one trader joked. “He should be playing golf in Hawaii somewhere.”

The traders' faith in Greenspan is easy to explain. They consider him the founder of this economy. Ravi Batra, a professor of economics at Southern Methodist University in Dallas, Texas, wrote in his 2005 book Greenspan's Fraud: How Two Decades of His Policies Have Undermined the Global Economy that Greenspan changed the concept of balanced foreign trade that had held sway for two centuries before him. He deregulated the American financial system and, since the dollar dominated world trade, other countries accepted the currency in exchange for their goods and services and used extra money to buy American stock. That situation also led to the loss of millions of American jobs.

Greenspan's prophecy about the coming economic downturn quickly began to come true. In march, it became clear that not all was well on the mortgage market, with many defaults. Immense sums were involved. Those credits were backing $824 billion in bonds. The entire American mortgage market, one of the world's largest financial markets with $5.8 trillion in circulation on it, was threatened. Stock market traders decided that the crisis would hit consumer and investment spending and serve as a signal to cut back production because of the economic decline. American stocks tumbled again.

A substantial slowing of the growth of American economic growth is now assumed by all. Last week, the IMF released the latest issue of its World Economic Outlook. The IMF has predicted 2.6-percent growth in the U.S. GDP in 2007 (already less than the 3.5-percent growth noted in the final quarter of last year). Now it is predicting only 2.2 percent. The OECD and U.S. National Association Business Economics predict that 2007 results will be as slow as in 2002, when GDP growth reached only 1.8 percent.

Experts began to pay attention to signs of slowing growth even in positive statistics showings by the U.S. economy. For example, employment figures for March were released last week, indicating that 135,000 new jobs were created. But everyone paid attention to the fact that jobs in industry decreased for the ninth month in a row and almost 16,000 people lost their jobs. And the number of people providing business services was reduced by 7000.

The prediction of a growth slowdown coincides with discussions of how the U.S. has ceased to be an industrial power at all. Some researchers, like Batra, say that Greenspan's policies and foreign competition killed American industry. Others point to the American producers themselves, who moved production abroad and turned to outsourcing. Researcher Eamonn Fingleton noted that the largest American corporations, which made the country a technological leader in the 1960s, are now so dependent on their Asian and European competitors because of outsourcing that they have lost control of the technology that is based on their products. Fingleton says that outsourcing to Japan is an acknowledgment of that country's industrial superiority. Thus the U.S. is left only with the service sector to develop. An industrial orientation is typical of a rich country, since industry requires significant capital. Fingleton lists Japan, Germany, Switzerland and China as the world's economic leaders because they are oriented to industry.



http://www.kommersant.com/p758972/r_528/economics_currency_/