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David Ignatius

Perils of an Empty Piggy Bank

By David Ignatius
Friday, September 24, 2004; Page A25

Wall Street is already voting in the 2004 election, and it's giving President Bush surprisingly low marks. Despite strong corporate profits, the Dow Jones industrial average has been stuck just above 10,000 -- trading in the same sluggish range it has maintained all year.

Reports this week by two respected economists suggest an explanation. They argue that fiscal and monetary policies during the Bush administration have effectively raided the nation's piggy bank to finance current spending. Without changes in policy, they suggest, we may be looking at an economy that continues to tread water -- or begins to sink.

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"Campaign 2004 has barely paid lip service to America's biggest economic problem," Morgan Stanley's Stephen Roach contends in a commentary this week. "The elephant in the room that the politicians continue to sidestep is the profound shortfall of national saving -- the sustenance of future growth and prosperity for any economy."

Under Bush, the federal government has burned through savings at an incredible clip. Roach notes that the government's net savings rate has gone from a surplus of 2.4 percent in 2000 to a deficit of 3.1 percent at the end of July. He reckons that's the largest swing from saving to dis-saving in the nation's history. "Little wonder that the politicians shy away from this issue -- they are the major source of the problem," Roach notes.

Households have done as miserably as the federal government at managing money. The personal savings rate is just 0.9 percent, says Roach, and when savings of all kinds are added together they total a net national rate of only 1.9 percent. Roach notes that an incumbent president has never stood for reelection with this key rate so low.

Bush's deficit spending -- doling out tax cuts and other fiscal stimuli without the money to pay for them -- is a big part of the nation's profligacy. But the Federal Reserve's monetary policy has also played a role, by keeping interest rates so low during 2002 and 2003 that homeowners were almost required to refinance their mortgages -- and in many cases translate home equity into consumable cash.

John H. Makin of the American Enterprise Institute estimates in a Sept. 22 report that cash-out refinancings pumped $100 billion annually into household disposable incomes in 2002 and 2003. That money helped consumers spend far more than they were making, according to Makin, with real consumer spending growing at 3.5 percent during the fiscal year that ended in July even though real disposable income grew at just 1.8 percent. During the three months that ended in July, consumption roared ahead at an annual rate of 4.2 percent while disposable income crept up at a rate of just 0.8 percent.

This raid-the-piggy-bank approach has allowed American consumers to play sugar daddy for the world economy. Spending down their savings, Americans have purchased the world's goods so avidly that they have pumped the current account deficit to a record 5.7 percent of GDP in this year's second quarter.

"Never before has a president stood for reelection with the United States more dependent on foreign financing of domestic growth," notes Roach. Looking at the countries, such as China and Japan, that finance this "increasingly tenuous disequilibrium," Roach wryly comments: "This is the real 'coalition of the willing.' "

Wall Street knows the numbers don't add up. And investors must have noticed this week when the head of the International Monetary Fund, Rodrigo Rato, lectured America about its deficits as if it were a Third World country. Thus the sluggish stock market -- despite corporate profit rates that have bounced back to bubble-economy levels of the late 1990s. Indeed, according to Fed valuation models cited by Makin, U.S. stocks that were trading well above "fair value" before the bubble burst in early 2000 are now well below.

Perhaps the reason for Wall Street's torpor is that investors have actually been following this wretched political campaign -- and noted the vapid debate about economics. Bush and Kerry are claiming they'll cut the budget deficit in half over the next four years, but neither is offering convincing details. "In fact," writes Roach, "there is good reason to worry that campaign promises of both parties could compound the problem rather than fix it." He notes that Bush's pledge to make his unfunded tax cuts permanent is "especially worrisome."

The presidential debate season is upon us. Maybe someone can force these candidates to stop sweet-talking the public about economics and explain how they plan to put some money back in the national piggy bank.

davidignatius@washpost.com


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