Sun, Jan 23, 2005 - Page 9 News List

The Republicans are celebrating, but economists are nervous

DPA , WASHINGTON

The inauguration of a US president is traditionally a spectacular festival -- a show of unity for the country after divisive elections, and an opportunity for entrepreneurs to curry favor with the White House.

But whether the second term of President George W. Bush will bring a spectacular economy is another question. The weakness of the dollar and record deficits throw long shadows across the economic landscape.

Bush has not lacked volunteers to pick up the US$40 million price tag on the celebrations.

Oil baron T. Boone Pickens of Texas threw US$250,000 into the inaugural basket.

John Kane, the chief lobbyist of the Atomic Energy Institute, is another big contributor -- in recognition for all Bush has done for the nuclear power industry, Kane told the Washington Post recently.

Bush already spent the first four years showing what a good friend he was to the corporate world. They received the lion's share of the benefits when Congress pushed through Bush's tax-cut programs.

In fact, the inaugural cup runneth over in covering the expensive balls -- including one for military officers who have served in Iraq, a gesture of somberness that recognizes there is a war going on.

But things don't look so rosy at the public coffers. The recession and the war in Iraq have already burned through the surpluses Bush inherited from former President Bill Clinton, and increased the US deficit at a rate of more than US$400 billion a year. The expensive tax cuts have put the government even further in the red.

The deficit stands at 3.6 percent of GDP. Economists and bankers, like Timothy Geithner, head of the New York Federal Reserve Bank, warn of the consequences.

He warned that international investors who pumped US$600 billion into the US economy last year could lose their confidence.

Specter

Worried that the current account deficit has reached 5 percent of GDP, Federal Reserve chairman Alan Greenspan, speaking in Frankfurt late last year, raised the specter of decreasing enthusiasm for dollar purchases.

"It seems persuasive that, given the size of the US current account deficit, a diminished appetite for adding to dollar balances must occur at some point," he said. "But when, through what channels, and from what level of the dollar? Regrettably, no answer to those questions is convincing. This is a reason that forecasting the exchange rate for the dollar and other major currencies is problematic."

The value of the dollar has dropped steadily, a net 10 percent by mid-month over the three years since introduction of the European currency.

While the drop has helped US exports, economists warn that Greenspan could be forced to escalate interest rates even faster if the dollar continues to decline, in order to keep investors interested.

Higher US interest rates could in turn slow down the US recovery -- and in turn have global repercussions for the world's main economic locomotive.

Vulnerable

Two economic analysts, Maurice Obstfeld and Kenneth Rogoff, of the National Bureau of Economic Research, recently came to the conclusion that the world economy is even more vulnerable to such changes than it was four years ago.

It is clear that the Bush administration does not share the unease of the economists. Paul O'Neill, ousted as Bush's treasury secretary in 2002, objected to Bush's plans for a second round of tax cuts.

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