The US Economy* This article about the US economy was published in November 2003 * The federal budget deficit has been announced recently in America. Happily, the deficit was lower than the initial estimates. Those estimates were for a shortfall of US$455 billion. The actual deficit was US$374.2 billion. This is a huge number. It is the biggest in history and by quite a margin too. Over the last two years and a forecast next, the numbers look like this: Year to 30 September 2002 - $157.8 billion deficit Year to 30 September 2003 - $374.2 billion deficit Year to 30 September 2004 - $500 billion deficit (forecast) (I read somewhere a few days back that if you were to divide the total deficit by the population, every family in America has a share of $108,471. And you thought mortgage loans were expensive!) We all know the reasoning behind some of these numbers. The war in Iraq has and will continue to cost huge sums. Whilst aid and assistance from other nations is limited, the American people will have to foot much of this bill. Bush has also pushed through some tax cuts. They were not cheap. And of course, the economy has been in recession. This is all well and good, but why am I mentioning this? The state of the US economy has some influence on us all. Whether you are involved in investments, your company trades with or is owned by or is American, there is an impact. There has to be. This is the largest economy on earth. If you followed the elections in California, you will know that just that State is the sixth largest economy in the world. However, the area that will really be influenced will be currency markets. And, if you are international in mindset, that probably means YOU! If you can, imagine a company quoted on the stock market. If it lost huge sums, year after year, and worse, bigger amounts each year, what would happen? The first thing is that the price of the shares being traded would fall. Most likely, they will fall a lot. In terms of a government, that means the currency rates will fall. This isn't really news I know. The value of the dollar has fallen over the last two years. However, it does mean that a rally is unlikely in the next few years to come. This throws up problems and opportunity for us all. If most of your wealth is held in US$ but you live and spend in Europe (for example), your dollars will buy you less here. On the other hand, your euro's will likely buy more dollars (book that holiday to Florida for next summer!). If you are paid in dollars, your paycheck is likely to continue falling each month. But, if you are an investor, opportunity abound! Why? Well, if you can hold assets for a while (I mean five plus years), the US economy will probably have picked up. Hopefully, Iraq and Afghanistan will be governing themselves (ok, who am I kidding?) and off the hands of the American taxpayer. Silicon Valley will be THE place to be again. A stable (and needs to be profitable) investment in America will have the chance to benefit twice. Once from the investment element and once from the currency translation. My thoughts are that doing so monthly would be better, as who knows how far the dollar may fall? It would be nice to benefit from that regularily rather than just the once. Other news out from the US economy shows productivity up sharply. The hope is that this huge deficit will be repaid within three to five years. Who knows? -------------------- Relative to sterling and other currencies What I just said above about the US economy, you must remember is all relative. If one economy is struggling, when compared to another, you will have movements in currency rates. If the British economy is firing along and the American economy is crawling, sterling will become stronger relative to the dollar. Well guess what? The UK economy is plodding along as it does. However, it was revealed about two weeks ago that the statistics the Bank of England uses were incorrect. I have been trying to hunt out the full details on the web, but have been unable to locate them. The detail though is largely inconsequential. The effect is that Bank of England needs to raise interest rates. As that starts to happen, sterling will be the place to be. Traders in the offshore centres of the world control much of the hedge fund and 'speculative' money looking for a home. The IMF and World Bank call this 'hot money'. That money will be moved out of dollar holdings and into sterling. Largely into either cash instruments or the UK gilts market. (Gilts are loans made to the government which are traded openly and pay a known interest rate). This will bring something of a double whammy. With the US economy in massive debt, some money would flow out of the dollar and this would speed up the decline of the currency. Now add in rising interest rates (and therefore rates of return) elsewhere and more money will be looking for a safer and more profitable home. The only real outcome is that the rate at which the dollar has been falling, relative to sterling, will increase over the coming months. * This was first published in November 2003 *
The American Economy
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