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While U.S. economic growth is increasingly lagging Asian growth, the global focus remains primarily on the U.S. economy as the world's supposed predestined locomotive, for the apparent reason that America's consumer is the world's greatest spender. Implicitly, the U.S. current-account deficit of about $560 billion per year reflects what Americans spend in excess of their current production and income. Yet the Asian countries, ex Japan, have a second reason to run a surplus with the United States. It is the main source of the high-powered money of their banking systems. As their central banks are buying gargantuan amounts of surplus dollars, they create liquid reserves for their banks that foster the lending boom to their domestic producers. Vastly excessive reserve growth is creating vastly excessive money and credit growth, stimulating and financing an unprecedented investment boom, similar to that in Japan in the late 1980s. Global activity data has kept surprising on the upside for months, and there has even developed speculation that unexpectedly strong global economic growth may fuel considerably higher inflation rates. Commodity prices, in the past generally an early indicator in this respect, have soared spectacularly. Given, moreover, years of extremely rampant money and credit growth around the world, accelerating inflation will be the next great surprise for many people. All this raises
many questions. It seems quite feasible that the Asian tigers, with their
record-high savings and investment ratios, will continue to power ahead
with runaway credit creation. Yet our fear rather is that some of them,
in particular China, may derail into Japan-style bubble economies.
Considering that the U.S. economy's long-term growth potential is around 3%, it should be clear that after three years, during which annual real GDP growth has averaged 1.8%, it will still take a lot more demand and growth acceleration to remove the output gap that has accumulated in these years. It is also generally agreed that a sustained and sufficiently strong recovery of the economy is only possible with a prompt, brisk rebound of business fixed investment. The bullish consensus is satisfied that this is happening. As reported, nonresidential business investment rose in the third quarter of 2003 by 11%, after 7.3% in the second quarter. For sure, these are impressive numbers, but the only thing that gives them this strength is the fact that the actual quarterly numbers have been annualized. The true non-annualized growth rates of 2.75% and 1.8% for the two quarters would have caused nothing but yawns. But there is a second big snag in the reported investment numbers. As usual, it arises from the familiar statistical spin concerning the measurement of business investment in computers. In real terms, or "chained" dollars, it increased over the full year until the third quarter of 2003 from $297.6 billion to $390.3 billion, that is, by $92.7 billion, of which $35.4 billion occurred in the third quarter. That is the statistical fiction; actual business spending in current dollars on computers increased over the same time by just $11.5 billion, from $76.8 billion to $88.3 billion, of which $5.9 billion was in the third quarter. In reality, measured in current dollars, nonresidential investment over the year increased overall by $46.2 billion. Among this total, computer investment soared by $93.1 billion, of which $81.6 billion came from the hedonic spin. Each additional dollar spent on computers in the real GDP accounts during the year translated into eight additional "chained" dollars, accounting, by the way, for 26% of real GDP in this time. The difference between the two measures of business computer investments is exploding. So much for the trumpeted investment recovery. As we have explained many times, these particular dollars are fictitious dollars that nobody has paid and nobody received. Obviously, such dollars inherently add nothing to profits. Putting it briefly and bluntly: The trumpeted brisk rebound in U.S. business capital investment is another bullish mirage lacking any serious substance. Given this reality, it seems likely that the coming year will find the U.S. "recovery" neither sufficiently robust nor constant enough to foster true self-sustaining economic growth in the U.S economy. Regards, Kurt Richebächer,
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