Australia Fears U.S. Crash

Headlines (Scroll down for complete stories):

1. Australian Treasury Secretary Fears U.S. Crash
2. Which Inflation Numbers Can You Really Believe?
3. Experts: U.S. Oil Stockpile Driving Up Prices
4. Investor Confidence In Russia Crumbles
5. Health Care Could Account For 19% Of U.S. Economy In 2014

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1. Australian Treasury Secretary Fears U.S. Crash

Australia's Treasury Secretary and his closest advisers fear "the U.S. is heading for a devastating financial crash that could ravage Australia's economic growth."

That was the lead story in the respected paper The Australian this weekend.

In a speech last week, Treasury Secretary Ken Henry likened the flood of money pouring into the United States to support its budget and current-account deficits to the stock market's Dot-Com bubble of the late 1990s.

If it were it suddenly to stop, there would be shockwaves felt throughout the world's economies.

The financial crash feared by Dr. Henry would involve a sharp fall in the U.S. dollar and a bond market sell-off, which would push up American and world interest rates.

Such a turn of events would impact U.S. economic growth and, as a result, cut Chinese exports of manufactured products to the American market. In turn, this would threaten the boom in Australian mineral exports to China, the Australian reported.

Fears that the world economy is in grave danger are growing in the major financial capitals.

The International Monetary Fund, which is responsible for the stability of the world economy, also warned last week of a sudden collapse.

IMF managing director Rodrigo de Rato said urgent combined international action was required to head off the dangers.

The main cause of concern is the fact that the United States is running a trade deficit of about $600 billion and a budget deficit of about $430 billion for 2005.

American imports are almost 50% greater than the country's exports, with the deficit being financed by international central banks and fund managers.

Despite signs that the deficit is getting bigger, money is still pouring into the United States from Asia and Europe at such a rate that the country has been able to keep its long-term interest rates steady at 4.2% since the middle of last year.

Dr. Henry said the flood of money was "worryingly reminiscent of Federal Reserve Chairman Alan Greenspan's warning in 1996 of irrational exuberance in U.S. stocks".

He said that, as with the Dot-Com bubble in the 1990s, one could not tell how long it would keep going, but it would burst eventually.

It is widely known that the U.S. dollar has been kept afloat by the intervention of the Chinese and Japanese central banks. But these banks and others – like that of South Korea – have already given notice that they will no longer be the buyer of last resort for the U.S. dollar.

Henry believes the boom in investment in American financial markets could be brought to a halt by a number of developments.

A slowdown in American growth could lead international private investors to pull out of the country.

Foreign central banks, which have been buying long-term American government bonds, are already facing big losses as a result of the fall in the value of the greenback.

"What if they change their mind?" Dr. Henry asked.

He said it was imperative that the Americans take action to reduce their budget deficit, while they should allow the value of the U.S. dollar to fall some more.

2. Which Inflation Numbers Can You Really Believe?
 
Experts were relieved after the government reported that the Consumer Price Index rose only 0.2 percent in January.

The announcement came after the Producer Price Index, which measures wholesale prices, jumped 0.8 percent in January – the highest monthly increase since 1998, according to The San Francisco Chronicle. This had led to concerns that the CPI would follow suit.

Since the early 1980s, producer prices have generally increased at a slower rate than consumer prices, so it's unusual to see the PPI running ahead of the CPI – especially by such a wide margin.

The simple reason producer prices are increasing faster than consumer goods is that "we have more excess capacity for consumer than producer goods," said John Lonski, chief economist for Moody's Investors Service, according to the Chronicle.

Many industrial material plants were closed during the past five years, "in response to earlier bouts of commodity-price deflation," Lonski said.

But the world economy recovered and emerging nations' insatiable demand for raw materials allowed manufacturers to recover and raise their prices. A sinking dollar has also had a lot to do with the price hikes. Many consumer goods come from Asian countries whose currencies are aligned with the dollar, and that reduces the dollar's impact on prices. That could change if China and other countries allow their currencies to rise, as some expect.

And if wholesale prices continue to rise and retailers can pass them along to the buyer, consumer inflation will pick up, which could prompt the Fed to increase interest rates more than expected this year.

3. Experts: U.S. Oil Stockpile Driving Up Prices

With gas prices surging, government officials are under pressure to provide some relief to consumers.

For some time, the Federal Government has been accumulating a stockpile of oil (the Strategic Petroleum Reserve) that could be used in a potential national emergency.

But analysts at the Heartland Institute say storing the oil is driving up prices and actually hurting the average American. They claim Americans would be better served if the government halted its purchasing and sold off the reserve.

According to the Heartland website, Johns Hopkins economics professor and Cato Institute senior fellow Steve Hanke observes: "On November 13, 2001, President Bush ordered the government to fill the Strategic Petroleum Reserve to its capacity of 700 million barrels. Since then, the SPR fill rate has accelerated and oil prices have gone through the roof, increasing from $21.67 to a record-setting $55.33 per barrel."

The Bush administration says the reserve is not intended to protect against high oil prices but rather against any catastrophic event that might interrupt the nation's supply, such as an embargo. But those are ineffective, since producers cannot stop oil from eventually being sold to embargoed countries. Hanke says the government's hoarding is the real danger.

"The power of inventory changes is best illustrated by revisiting the Gulf War of 1991. On Jan. 16, the first day of the war, George H.W. Bush threatened to release oil from the government's stockpile. The results were dramatic: The spot price of oil fell from $32.25 per barrel to $21.48 in one day. More importantly, the positive spread between spot and four-month futures prices also fell, from $5.90 per barrel to $1.65, indicating a higher comfort level with the adequacy of private inventories."

4. Investor Confidence In Russia Crumbles
 
Deputy Economics Minister Andrei Sharonov has told the Russian State Duma that the flight of capital from Russia reached $8 billion in 2004, quadrupling 2003 outflows, RIA Novosti reports. Sharonov attributes this trend to lessened investor confidence, the result of raids by Russian tax authorities against Yukos and other large corporations.

Kompaniya magazine, meanwhile, notes that legislation recently introduced by the pro-Kremlin "United Russia" party would give the Russian government the right to charge companies and individuals with tax evasion without a prior court decision and would also expand its power to confiscate the property of those convicted of crimes.

Russia remains a highly speculative to place your investments.

5. Health Care Could Account For 19% Of U.S. Economy In 2014
 
Health care growth is due to outpace economic progress during the next decade, as the nation's health costs – which are already the highest per capita in the industrialized world – might hit $3.6 trillion by 2014. That would account for 19% of the economy, up almost 4% from current projections.

According to USA Today, while the growth of health insurance premiums will continue to slow, the annual increases will still exceed growth in workers' disposable income. More could become uninsured as a result. And as spending rises, public health programs like Medicare and Medicaid will pay an increasing proportion, totaling 49% of all spending by 2014, up from 45.6% in 2003. And the government says that could have important implications for the budget as a whole.

This is putting a massive strain on state and federal government bodies.

The pressure on public programs and the rise in health care's share of the U.S. economy, "almost make tax increases inevitable," says economist Paul Ginsburg of the Center for Studying Health System Change.

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