this is going to sound like a stupid question, but as we know, there are no stupid questions, just stupid people:

why has the DOW risen to over 11,000 when the deficit is at a record high? why do people use the DOW as a marker of economic growth when it seems to have no bearing on the country's economic health? why do i keep reading conflicting reports about the economic health of the country?

is it really the rich getting richer and to hell with the rest of us?



http://www.comcast.net/news/finance/ind ... _usdeficit

Here's some background on the deficit:

http://en.wikipedia.org/wiki/Trade_deficit

It gives some simple explainations as to why trade deficits are always bad.


Stocks, bonds, the Dow, those are all priced based on speculation. If the Dow rises, it's usually because institutional investors believe that coporations will perform better financially in the near future. This is a sign of confidence in the economy, and a good thing.

As for the rich getting richer, it takes money to make money. So the rich will almost always get richer. The trick is to grow the economy so that the poor can get richer too. Perhaps you have heard the expression "a rising tide lifts all boats."

thanks for that link. now i remember why i steered clear of economics in college.

i found this too:



i'm not alan greenspan, but i know that when a red line goes down, it is bad.

one other question: in that link, a proponent of microeconomics believes that a trade deficit is inconsequential because "currency always comes back somehow". but how is that responsible to the people we are borrowing from?

isn't china going to get almighty pissed off if we don't make good?

No, because they are net gainers in this situation. We gain to buy have a great selection of goods available to us at lower prices, even if money is flowing out of our economy in trade. The US has already renegged on it's debts, when we switched off of the gold standard. So long as we can keep productivity high and inflation low, we should be ok.

The only real losers are Americans who refuse to save and invest. Should the economy tank, the rich will move their money out of American markets (probably to the Euro) and not lose much. The smart middle class will follow. Those who prefer to live for today and not invest will be left out in the cold.


If you are interested in learning how to become rich w/o inhereting, rapping, shooting hoops, drugs, or stealing; I highly recommend this book:

http://www.amazon.com/gp/product/1563523302/sr=8-2/qid=1142351305/ref=pd_bbs_2/103-8739964-3326249?%5Fencoding=UTF8

It changed my perception of "rich" people, whom are often confused with the ultra-rich, and how they got to their success.

I can't believe there isn't an outrage about Goldman Sachs profits!!!

People bitch about Exxon, yet Goldman Sachs posts a 7 billion profit and no one says a word. This country has its priorities backwards.

Millionaire Next Door is a killer book. Lots of great advice in there. Gives you great license to laugh at all of your dipshit buddies who insist on leasing a new car every 5 years.

Hahahaha I love that bonds is asterisked in this thread.

Funny as hell, man.

well, since i am writing the Next Great American Novel, i plan to get rich that way...

but my husband is a huge proponent of saving and investing (i think i'm lucky even though i really want that cute blouse). i think i am going to get him that book as it can only help us save even more (but if Pearl Jam keeps touring we are going to go completely broke ).

The deficit, for the most part, is a function of the current federal government's absolute complete and total inability to control spending. History has shown that when the congress and whitehouse are controlled by the same party, profligate spending is usually the result; Bush and company have re-written the books on uncontrolled spending.

That being said, and much to the chagrin of liberals everywhere, the economy remains healthy(anybody check out GDP and unemployment lately?) because, quite simply, capitalism and (relatively) free trade work.
How anyone can embrace leftist economic policies at this point(especially in the US) is, well, mysterious.

then why in the world do people get all up in arms about this deficit being so high, and alternately, why was all of clinton's "fiscal responsibility" such a big deal?

Because Man In Black thinks that printing more dollars is the solution to the economy when its quite the opposite, long term.

If the economy is in such great shape then why is the interest rates still being raised. Why is their almost a invert yield curves between the 2,10-year and the 30-year bond?

Oh and the DOW rally is a joke. There is no volume to this rally. Volume proceeds price! Stock markets go much lower in the next few months, then a rally in the fall.

i totally should not have skippped out on economics in college.

I believe the original article was about the trade deficit, not the federal budget deficit. And I completely agree that Bu$ie & Friends are worse spenders then the democrats the demonized in 2000.

---

The following gives a interesting view of the Trade Deficit with regards to China, I have bolded the key points for those who hate reading novel-like posts:

http://www.morganstanley.com/GEFdata/digests/20060309-thu.html

Global: Save More! Save Less!
The latest views of Morgan Stanley Economists

Stephen Roach (New York)

The two major players in the global economy, the US and China, are operating at opposite ends of the saving spectrum. Thrifty Chinese have taken saving to excess, while profligate Americans have spent their way into debt. Neither of these trends is sustainable — they lead to destabilizing economic and political developments for both nations — and a better balance must be struck. China needs to convert excess saving into consumption, while the US needs to end its buying binge and rediscover the art of saving.

The numbers leave little doubt as to the extraordinary contrast between the two economies. Last year China saved about half of its gross domestic product, or some $1.1 trillion. At the same time, the US saved only 13% of its national income, or $1.6 trillion. That's right, the US, whose economy is six times the size of China's, can't manage to save twice as much money.

And that's just looking at national averages that include saving by consumers, businesses, and governments. The contrast is even starker at the household level — a personal saving rate in China of about 30% of household income, compared with a US rate that dipped into negative territory last year (-0.4% of after-tax household income).

These are extreme readings by any standard. The US hasn't pushed its personal saving rate this far into negative territory since 1933, in the depths of the Depression. And the Chinese rate is higher than it has been at any point in the past 28 years, since its modern reforms began. Similar extremes show up in the consumption shares of the two economies — the mirror image of trends in personal saving rates. US consumption has held at a record 71% of GDP since early 2002, while Chinese consumption appears to have slipped to a record low of about 50% of GDP in 2005.

In China's case, relatively weak consumption means its growth dynamic is skewed heavily toward exports and fixed investment. These two sectors account for more than 75% of Chinese GDP and are growing by more than 25% a year. If China stays with this growth mix, any further increase on the export side would be a recipe for trade friction and protectionist responses. That's certainly the direction Washington is heading in these days. Moreover, a continued burst of Chinese investment could lead to excess capacity and deflation at home.

The US saving shortfall is equally stressful. American consumers have mistaken bubble-like appreciation of their homes for saving. Facing anemic growth in labor incomes — real compensation paid out by the private sector has lagged behind the norm of past business cycles by more than $360 billion — they have turned to debt-financed equity extraction from their homes in order to keep consuming. And the binge has reached record highs in terms of both the amount consumers owe as a share of their incomes and the interest expenses they incur to service those obligations.

America's lack of saving has also put unprecedented demands on the rest of the world, since the US must import surplus saving from abroad in order to grow. America's current account deficit hit a record of nearly 6.5% of GDP in 2005 and could well be headed north of 7% this year. That translates into a lifeline of foreign capital totaling about $3 billion per business day.

There is a more insidious connection between the saving postures of China and the US: Chinese savers are, in effect, subsidizing the spending binge of American consumers. In order to fuel its export-led economic growth, China has decided to keep its currency relatively cheap and tightly pegged to the dollar. To do so, it must constantly recycle a large portion of its saving into dollar-denominated financial assets — an investment strategy that helps keep US interest rates low and an interest-rate-sensitive American housing market in a perpetual state of froth.

That's dangerous for the US, but it's also an increasingly risky proposition for China because it bloats that country's money supply. This excess liquidity then spills over into the Chinese financial system, leading to asset bubbles such as those in its coastal property markets. China is also exposed to the potential fiscal costs of a sharp markdown of its portfolio of dollar-based assets in the event of a depreciation of the US currency.

It is in neither country's best interest to stay the present course. Instead, there must be a role reversal: China's savers must be turned into consumers, and the excesses of US consumption must be converted into saving. This won't be an easy task for either nation, but it sure beats the increasingly treacherous alternatives.

In the US, it will take nothing short of a major campaign to boost national saving. That will require a reduction of public-sector dissaving (i.e., outsized federal budget deficits) and the enactment of some form of consumption tax. A national sales tax would be the simplest and most efficient prescription, provided there are exemptions for low- and lower-middle-income families. It would reduce incentives for consumption, freeing up income to be saved, and also help reduce the federal deficit. Sadly, there is little reason to be optimistic that Washington is about to embrace a pro-saving policy agenda. The budget deficit is going the other way, and the lack of political support for tax reform effectively quashes any immediate hopes for private-saving incentives.

In China, it will also take major policy initiatives to spark consumption-led growth. Actions are needed on two fronts — the establishment of a social-welfare safety net to deal with job and income insecurity arising from reforms of state-owned enterprises; and the creation of new jobs, especially in the undeveloped services sector, to expand the purchasing power of China's enormous population.

The good news is that the Chinese leadership is focused on shifting its growth mix toward private consumption. Pilot projects already have been established setting up a social security system. And under the terms of China's WTO accession, the opening of domestic services to foreign investors in areas like retail and insurance is likely to accelerate over the next three to five years.

China's determination stands in sharp contrast to Washington's inattentiveness to saving initiatives. That could spell trouble. As Chinese saving is converted into consumption, it will have less surplus capital that can be used to fund America's saving shortfall. That means China will be reducing its support for the American consumer. And that would raise the odds of a hard landing for the dollar and the US economy, with dire consequences for a still US-centric global economy. The US and China need to get their saving agendas in order before it is too late for them — and for the rest of the world.

I don't necessarily agree with what the article has stated about Americans not saving.

1. The Federal government has set up many tax advantages for owning a house. Many americans use the equity homes as part of their "savings". Especially over the last few years, many people have "traded up".

2. For the past few years interest rates have been at an all-time low. People aren't going to put money in a bank at 2% interest rate.

3. The stock market has bottomed out over the last few years, hence, the reason why mutual funds are seeing record low money coming into the funds.

4. The government has set up some great incentives to save via Roth IRA and now the Roth 401k,etc.

now i feel even more stupid

there is more than one deficit? there is a trade deficit and a budget deficit, and these are not one and the same?

Debt financed equity and savings are different, as the article points out. Which would you rather have:

1.)$200k in a money market account
2.)$250k in equity in a house you owe $200k on

For me it's m.m. account. Though that's just my opinion, I could be wrong.



Both true. But the article points out, and rightly so, that the money is being used for consumption instead of investment/savings into other areas. That is a problem. 25 percent of U.S. households have net assets of less than $10,000.




Those are great and everyone should use them, but the large majority of the population doesn't. They buy flat screen TVs instead.

I'm not sure that a trade imabalance is that much of a problem in the short term. We always seem to be able to come out with the next big thing. My only fear is that with Bush the next big thing is being squashed. It's pretty clear to me that biotech is going to continue to be huge but scientists can't mess with stem cells so they move to Asia. We're also going to miss out on a Green Planet. The technology of being green isn't being developed here because we're not part of Kyoto. That's going to be a huge market in the future....especially in energy. Despite what Bush says, we're not that close to a Hydrogen economy.

Budget Deficit:

http://en.wikipedia.org/wiki/Budget_deficit


Don't feel bad bro. I know very few people, myself included, that really understand globalized macroeconomics. Plus the media often uses the word 'deficit' without specifying which deficit they mean. Isn't it sad that there are so many deficits that we have to differentiate between them?

I suck at figuring out the quotes. Sorry.

1. Money markets are around 1%. On a $200,000 investment you would make $2,000 in a year. Where as your house grows at a traditional rate of 4-7% depending on where you live. Let's say its only 4% growth for your house, that would equal around $8,000. Then you get to deduct your interest you paid on your loan and that could easily equal another $1000-$2000. You can have the money market account, I'll take a house as a better investment.

2 & 3. I guess that's my point. Why invest or save when chances are your money won't be working for you? Instead it may make sense to purchase items the past few years when borrowing money is so cheap because of low interest rates.

4. Well the govt can't force people to invest. They're pissing away free money.


I agree with you. People don't save/invest. The train is about to leave the station pretty soon though. Time to make some real $$$$.