[Benjamin]

Fortsetzung...

The Fed Funds Rate (FFR)target has been lifted eight times in steps of 25 basis points from 1% in mid-2004 to 3% on May 3, 2005. If the same pattern of "measured pace" continues, the FFR target would be at 4.25% by the end of 2005. Despite Fed rhetoric, the lifting of dollar interest rates has more to do with preventing foreign central banks from selling dollar-denominated assets, such as US Treasuries, than with fighting inflation. In a debt-driven economy, high interest rates are themselves inflationary. Raising interest rates to fight inflation could become the monetary dog chasing its own interest-rate tail, with rising rates adding to rising inflation, which then requires more interest-rate hikes. Still, interest-rate policy is a double edged sword: it keeps funds from leaving the debt bubble, but it can also puncture the debt bubble by making the servicing of debt prohibitively expensive.

To prevent this last adverse effect, the Fed adds to the money supply, creating an unnatural condition of abundant liquidity with rising short-term interest rates, resulting in a narrowing of interest spread between short-term and long-term debts, a leading indication for inevitable recession down the road. The problem of adding to the money supply is what John Maynard Keynes called the liquidity trap, that is, an absolute preference for liquidity even at near-zero interest-rate levels. Keynes argued that either a liquidity trap or interest-insensitive investment draft could render monetary expansion ineffective in a recession. It is what is popularly called pushing on a credit string, where ample money cannot find creditworthy willing borrowers. Much of the new low-cost money tends to go to refinancing existing debt taken out at previously higher interest rates. Rising short-term interest rates, particularly at a measured pace, would not remove the liquidity trap while long-term rates stay flat because of excess liquidity.

The debt bubble in the US is clearly having problems, as evident in the bond market. With just 14 deals worth $2.9 billion, May 2005 was the slowest month for high-yield bond issuance since October 2002. The late-April downgrades of the debt of General Motors and Ford Motor to junk status roiled the bond markets. The number of high-yield, or junk-bond, deals fell 55% in the March-to-May 2005 period compared with the same three months in 2004. They were also down 45% from the December-through-February period. In dollar value, junk-bond deals totaled $17.6 billion in the March-to-May 2005 period, compared with $39.5 billion during the same three months in 2004 and $36 billion from December 2004 through February 2005. There were 407 deals of investment-grade bond underwriting during the March-to-May 2005 period, compared with 522 in the same period 2004 - a decline of 22%. In dollar volume, some $153.9 billion of high-grade bonds were underwritten from March to May 2005, compared with $165.5 billion in the same period in 2004 - a 7% decline.

Oil at $50 a barrel, along with astronomical asset-price appreciation, particularly in real estate, is giving the debt bubble additional borrowed time. But this game cannot go on forever and the end will likely be triggered by a new trade war's effect on reduced trade volume. The price of a reduced US trade deficit is the bursting of the US debt bubble, which could plunge the world economy into a new depression. Given such options, the United States has no choice but to ride the trade-deficit train for as long as the traffic will bear, which may not be too long, particularly if protectionism begins to gather force.

The transition to offshore outsourced production has been the source of the productivity boom of the "New Economy" in the US in the past decade. The productivity increase not attributable to the importing of other nations' productivity is much less impressive. While published government figures of the productivity index show a rise of nearly 70% since 1974, the actual rise is between zero and 10% in many sectors if the effect of imports is removed from the equation. The lower productivity values are consistent with the real-life experience of members of the blue-collar working class and the white-collar middle class who have been spending the equity cash-outs from the appreciated market value of their homes. World trade has become a network of cross-border arbitrage on differentials in labor availability, wages, interest rates, exchange rates, prices, saving rates, productive capacities, liquidity conditions and debt levels. In some of these areas, the US is becoming an underdeveloped economy.

The Bush administration continues to assure the US public that the state of the economy is sound while in reality the country has been losing entire sectors of its economy, such as manufacturing and information technology, to foreign producers, while at the same time selling off part of the nation to finance its rising and unending trade deficit. Usually, when unjustified confidence crosses over to fantasized hubris on the part of policymakers, disaster is not far ahead.

The Clinton legacy
To be fair, the problems of the US economy started before the administration of George W Bush. The Clinton administration's annual economic report for 2000 claimed that the longest economic expansion in US history could continue "indefinitely" as long as "we stick to sound policy", according to chairman Martin Baily of the Council of Economic Advisers (CEA) as reported in the Wall Street Journal. A New York Times report differed somewhat by quoting Baily as saying: "stick to fiscal policy." Putting the two newspaper reports together, one got the sense that the Clinton administration thought its fiscal policy was the sound policy needed to put an end to the business cycle. Economics high priests in government, unlike the rest of us mortals who are unfortunate enough to have to float in the daily turbulence of the market, can afford to focus aloofly on long-term trends and their structural congruence to macro-economic theories. Yet outside of macro-economics, "long-term" is increasingly being redefined in the real world. In the technology and communication sectors, "long-term" evokes periods lasting less than five years. For hedge funds and quant shops, long-term can mean a matter of weeks.

Two factors were identified by the Clinton CEA Year 2000 economic report as contributing to the "good" news - technology-driven productivity and neo-liberal trade globalization. Even with somewhat slower productivity and spending growth, the CEA believed the economy could continue to expand perpetually. As for the huge and growing trade deficit, the CEA expected global recovery to boost demand for US exports, not withstanding the fact that most US exports are increasingly composed of imported parts.

Yet the United States has long officially pursued a strong-dollar policy that weakens world demand for US exports. The high expectation on e-commerce was a big part of optimism, which had yet to be substantiated by data. In 2000, the CEA expected the business to business (B2B) portion of e-commerce to rise to $1.3 trillion by 2003 from $43 billion in 1998. Goldman Sachs claimed in 1999 that B2B e-commerce would reach $1.5 trillion by 2004, twice the size of the combined 1998 revenues of the US auto industry and the US telecom sector. Others were more cautious. Jupiter Research projected that companies around the globe would increase their spending on B2B e-marketplaces from US$2.6 billion in 2000 to only $137.2 billion by 2005 and spending in North America alone would grow from $2.1 billion to only $80.9 billion. North American companies accounted for 81% of the total spending in 1998, but by 2005, that figure was expected to drop to 60% of the total. The fact of the matter is that Asia and Europe are now faster growth markets for communication and technology.
Reality proved disappointing. A 2004 UN Conference on Trade and Development (UNCTAD) report said that in the United States, e-commerce between enterprises, which in 2002 represented almost 93% of all e-commerce, accounted for 16.28% of all commercial transactions between enterprises. While overall transactions between enterprises (e-commerce and non e-commerce) fell in 2002, e-commerce B2B grew at an annual rate of 6.1%. As for business-to-consumer (B2C) e-commerce, UNCTAD reported that sales in the first quarter of 2004 amounted to 1.9% of total retail sales, a proportion nearly twice as large as that recorded in 2001. The annual rate of growth of retail e-commerce in the US in the year to the end of the first quarter of 2004 was 28.1%, while the growth of total retail in the same period was only 8.8%. Dow Jones reported on May 20, 2005, that first-quarter retail e-commerce sales in the US rose 23.8% compared with the year-ago period to $19.8 billion from $16 billion, according to preliminary numbers released by the Department of Commerce. E-commerce sales during the first quarter rose 6.4% from the fourth quarter, when they were $18.6 billion. Sales for all periods are on an adjusted basis, meaning the Commerce Department adjusts them for seasonal variations and holiday and trading-day differences but not for price changes.

E-commerce sales accounted for 2.2% of total retail sales in the first quarter of 2005, when those sales were an estimated $916.9 billion, according to the Commerce Department. Wal-Mart, the low-priced retailer that imports outsourced goods from overseas, grew only 2%, indicating spending fatigue on the part of low-income US consumers, while Target Stores, the upscale retailer that also imports outsourced goods, continued to grow at 7%, indicating the effects of rising income disparity.