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Good Plan!

I'm not in the busines of handing out investment advice, but I think people may want to take a look at euro-denominated assets. Jonathan Weisman explains the president's "plan" to cut the deficit:

To cope with the cost of his agenda, Bush said he would impose "spending discipline" on Congress and spur economic growth to boost tax revenue. But he has also made it clear he would not cut defense or homeland security spending, and he has promised more spending for education.

The remaining spending at Congress's discretion -- transportation, law enforcement, veterans, agriculture, housing, health research, space exploration and national parks -- totaled $346.5 billion in 2004, not much less than the budget deficit. Eliminating all nondefense, non-homeland security spending may not be enough to balance the budget and cover the cost of the president's Social Security plan.

That, to be clear, assumes that the total cost of the wars in Afghanistan and Iraq will be $0.00 over the next four years, hardly a realistic assessment. The likelihood that the GOP is going to eliminate the remainder of the federal government, meanwhile, is low.

UPDATE: "Dollar expected to fall amid China's rumoured selling". Uh oh....

November 7, 2004 | Permalink

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Comments

I'm not in the busines of handing out investment advice, but I think people may want to take a look at euro-denominated assets.

Apparently a lot of people are doing so, world-wide.

Posted by: P.B. Almeida | Nov 7, 2004 4:51:55 PM

Well, "cut" the deficit is not the same as "eliminate" the deficit.

Also, economic indicators are already trending upward, meaning an upcoming uptick in revenues.

Finally, the existence of a deficit does not mean that the European Union is going to start outperforming the United States anytime soon.

Posted by: Ken | Nov 7, 2004 4:52:23 PM

and the big question, p.b., is whether the chinese central bank will be one of them.

as for weisman, i think maybe prof delong's endless critiques of the man might have broken through, since this may be the first piece of his that i can recall in which bushian spin didn't take the lead.

as for the looming fiscal crisis, the markets (meaning the bond market and the currency markets) appear to be noting with displeasure that bush's fiscal policies make no sense whatsoever. Note the bush apparatchik who concedes in the article that: a.) he doesn't really mean cut the deficit in half, unless you start with a phony baseline; b.) they never intended to count social security privatization in the mix.

Bond and currency traders are firmly in the reality-based world: they may disagree as to what the future holds, but they rarely are mistaken about the present.

which is more than we can say for the bush economic team and Mr. backbone himself.

Posted by: howard | Nov 7, 2004 4:55:07 PM

Ken, exactly what point are you trying to make?

"Cut the deficit in half" is a very clear sentence; it simply isn't something that bush intends to do.

an uptick in revenues from growth is already discounted into the numbers, so i'm not sure what you think you are saying there; as for the economic uptrend you describe, perhaps you can tell us where you see it? You mean that after 3 consecutive quarters of declining gdp growth, we finally saw a minor increase in gdp growth, at least in the initial q3 numbers? Since in reality, q3 gdp growth is less than half of the one blowout quarter of the entire backbone administration, q3, 2003, i'm not sure what you're trying to say.

And your last sentence i can't figure out at all, but to try and sort things out, let me simply say that if there isn't an indication to the bond and currency markets that the deficit is going to have a significantly lesser existence in the near future, the economy isn't going to grow.

Posted by: howard | Nov 7, 2004 4:59:19 PM

and the big question, p.b., is whether the chinese central bank will be one of them

Howard: I believe I read recently that China has already sharply cut back its dollar buys, and that most central-bank demand for greenbacks of late has been from Japan. I'm not sure if this is true or not, but, regardless, I wonder why rates aren't rising. Maybe they are a bit, but, I check Bloomberg.com pretty frequently and they've been quoting 5.28 as the 30-year fixed rate of record in the U.S. now for some time. What gives?

Posted by: P.B. Almeida | Nov 7, 2004 5:01:26 PM

p.b., first off, i was lazy and didn't type "chinese and japanese central banks."

second off, i don't know whether the chinese have cut back their bond purchases or not; i think we have to wait and see.

and third, if they do both cut back, i don't expect a crisis the next day; i expect a drift upwards in rates and downward in the dollar and a mild form of stagflation to arise as a result.

as the old wall street saw goes, i can tell you what's going to happen but not when, or when something's going to happen, but not what.

Posted by: howard | Nov 7, 2004 5:04:31 PM

lol...Yes!!! George Soros and Daily Kos didn't flush enough Democrat blood money down the toilet. Let's buy Euros!!!

Posted by: Modern Crusader | Nov 7, 2004 5:07:13 PM

hey, I don't need the interstate highway system to get to work or to my polling place.

Posted by: katherine | Nov 7, 2004 5:36:08 PM

MC (Yigal Amir)-

Huh? WTF? pleeze explain

-heh

Posted by: heh | Nov 7, 2004 5:41:17 PM

Rather than eliminate all Congressional discretionary spending, it would be far kinder to take Congress out and shoot them now.

Posted by: Dick Durata | Nov 7, 2004 5:44:46 PM

check out the Financial Times, Warren Buffet is dumping dollars for euros.

Posted by: Alice Marshall | Nov 7, 2004 6:02:28 PM

While Mr. Yglesias does not make his living by making investments for money, I am a practitioner. I can assure Mr. Crusader that holding non-dollar denominated assets do not gurantee a trip to the poorhouse. Mr. Crusader has two choices open to him if he disagrees: he can argue, or he can short a trade-weighted basket of currencies against the dollar in the futures market.

The latter case, it must be noted, would not only richly reward him were he right about the future course of the currency markets, but also quickly bankrupt him if he turns out to be wrong.

Full disclosure: my personal portfolio is and has been heavily exposed to non-US currencies. The conventional wisdom is that the US cannot maintain its current account deficit, and that it shall be made to close by a continuing fall in the dollar, a rise in US interest rates, or both.

Posted by: wcw | Nov 7, 2004 6:04:29 PM

Record deficits, the dollar's heading south, gold is heading toward $500/ounce: are we reliving the 70's?

Posted by: andrew | Nov 7, 2004 6:24:40 PM

Seriously, why hasn't the bond market reacted more strongly to U.S. borrowing?

Posted by: Brittain33 | Nov 7, 2004 6:28:23 PM

gold is heading toward $500/ounce

ah, all those lucky people who paid attention to the MONEX commercials on CNN (buy the pretty shiny gold bars ... look how pretty. they're filled with chocolate!) must be happy about that.

hmm.

Posted by: cleek | Nov 7, 2004 6:30:35 PM

The conventional wisdom is that the US cannot maintain its current account deficit, and that it shall be made to close by a continuing fall in the dollar, a rise in US interest rates, or both.

wcw: It's definitely "both" right?

Correct me if I'm wrong, but, even if the dollar were to fall sharply, and the powers that be who oversee such matters are content to let the market take its course, interest rates will almost certainly need to rise as a result. This is because lenders of money to the U.S. government, especially foreigners, are unlikely to continue doing so if they know the dollars they'll be paid back in are steadily growing less valuable. They'll therefore demand more interest in return, and Washington will have to pay higher rates to borrow the many billions its does each month. Private sector rates in the U.S. will quickly follow. Absent massive cuts in Washington's borrowing requirements, I don't see any way U.S. interest rates won't move upwards eventually.

I heard a commentator yesterday on PBS's Wall Street Week mention that "there's no law saying expansions have to last ten years". Indeed.

Posted by: P.B. Almeida | Nov 7, 2004 6:32:12 PM

I just hope China holds off until after I exchange my currency. I'd hate to have to pay $5 for a handle of liquor.

Posted by: Matt Singer | Nov 7, 2004 6:36:17 PM

"I don't see any way U.S. interest rates won't move upwards eventually."

I think, IIRC, there are at least two other options:a) hyper-inflation, b) a government command economy artificially reducing demand, as in WWII level rationing and GI Joe/Rosie the Riveter cheap labor in the level of tens of millions of people.

Hey! We will not allow Iran to get nukular weapons!

Posted by: bob mcmanus | Nov 7, 2004 7:01:47 PM

Off topic, but, according to Drudge, Bush is going to nominate me for Chief Justice. Yipeeee!

Posted by: Clarence Thomas | Nov 7, 2004 7:05:37 PM

I'm wondering that currency the states that secede will use. Should they use their own dollar, or could they adopt the euro?

Posted by: JBoogey | Nov 7, 2004 7:11:03 PM

http://www.j-bradford-delong.net/movable_type/2004-2_archives/000514.html

The Coming Collapse of the Dollar?
By Brad DeLong - University of California at Berkeley

At the moment, the U.S, is running large trade deficits as foreigners take dollars they would otherwise use to buy exports and use them to buy property, stocks, bonds, and other assets in the U.S. But someday foreigners will conclude that they have enough invested in the U.S. Their appetite for dollars to fund investments in America will diminish. The trade account will move back into balance. And a declining demand for dollars will push the value of the dollar down. Odds are that when foreign investors are satiated with dollar assets--whether that comes one, five, or twenty years from now--the value of the dollar in terms of other countries will be 30 to 60 percent less than it is now.

And so we get to one of the deep mysteries of today's economy: if the dollar today is indeed above its expected long-run equilibrium value by so much, why don't investors demand a premium return--an extra 3% or more in the current interest rate--in order to be happy holding the dollar assets they do? Since dollar interest rates are about equal to those outside, what business does the dollar have being above its long-run fundamental value? All our models say that--given the low level of U.S. interest rates--the dollar should *already* have collapsed to perhaps 2/3 of its present value.

The best answer I've come up with is that the dollar is above its fundamental value because most people who might place very large bets on a rapid decline in the dollar thinks such bets are still too risky, but the risk associated with them is falling every day, and someday...

Posted by: lise | Nov 7, 2004 7:33:33 PM

Bob: Hyperinflation would still cause interest rates to go up.

Posted by: Walt Pohl | Nov 7, 2004 8:43:09 PM

So my wife and I have been talking to the people who handle our pittance, and they basically just say, do it our way or do it yourself. Their way is keeping about 90% of everything in dollar-denominated stocks and bonds. And the fact is that we don't know how to do it ourselves and don't have the time to work up the expertise to choose euro-denominated stocks and bonds.

Anyone have any recommendations for financial management firms that will get us out of the dollar?

Posted by: SqueakyRat | Nov 7, 2004 8:51:04 PM

I'm freaking out.

Posted by: roo roo | Nov 7, 2004 9:01:47 PM

I just keep most of my assets in renminbis in my new bomb shelter.

Posted by: praktike | Nov 7, 2004 9:04:17 PM

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