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Take broad economic view, maybe you'll feel better

In El Alto, Bolivia, a billboard contrasts the plunging U.S. dollar with the bright pink euro note, encouraging savers to turn to the euro. “If the dollar’s going down … save it in euros!!!”

Associated Press

In El Alto, Bolivia, a billboard contrasts the plunging U.S. dollar with the bright pink euro note, encouraging savers to turn to the euro. “If the dollar’s going down … save it in euros!!!”

WASHINGTON — Retail sales plummeting. The dollar at a new low. A 60 percent jump in U.S. home foreclosures. A major investment fund going kaput.

This is what a reordering of the world economy looks like in real time.

Don't think of Thursday's news — the dollar plumbed new lows against the Japanese yen and other major currencies, the price of an ounce of gold topped $1,000 for the first time, lenders raised home loan rates, retail sales fell — as discrete events.

These developments are small pieces of a much bigger reversal in a series of imbalances that made Americans feel richer than they were and created unsustainable distortions in the world economy that are now righting themselves.

Americans are consuming less, and their houses and other assets are becoming less valuable. Painful as they may be, in the long run both trends must happen to restore sustainable growth. But in the short run, they are wrenching changes that are probably causing a recession.

The weaker U.S. economy, combined with low interest rates due to Federal Reserve rate cuts, has made world traders less inclined to buy dollars. Thus, the value of a dollar fell below 100 yen Thursday for the first time since 1995, and slumped to a new low against the euro. Unpleasant as that is for people planning European vacations, it should help cushion the blow to the economy by making U.S. exporters more competitive.

On the way up, a worldwide boom of cheap credit fueled consumer spending, kept the U.S. economy strong and artificially boosted the prices of real estate and other assets. Now the reverse is happening. Lenders made too much money available, taking on too much risk for too-low interest rates.

The pullback is reflected in Thursday's other big business news, the default of Carlyle Capital, a fund operated by Washington-based private equity giant Carlyle Group. The Carlyle fund had increased its returns by borrowing money from banks to buy securities backed by mortgages. When the value of those securities fell and lenders demanded more collateral, lenders took control of the fund and began dumping its assets into a market that already is swimming in such securities.

Simultaneously, the lessening availability of credit is causing consumers to spend less. That causes lenders to be more cautious, making the credit problems more severe.

There was clear evidence Thursday that Americans are spending less. The Commerce Department reported that retail sales fell 0.6 percent in February, a sign that consumers are bringing their spending more in line with what they can afford after a decade of spending beyond their means. Auto dealers and restaurants took the biggest hits.

This pullback by consumers and reduction in credit availability are behind the increase in home foreclosures that RealtyTrac announced Thursday. The 60 percent jump reflects the fact that U.S. assets are becoming less valuable, making consumers poorer. With home prices, the dollar and stock prices all down, we aren't as rich as we thought we were.

"The distress we are seeing in the credit markets, the pullback in consumer spending, the retreat in the dollar — these are really all part of the same story," said David Rosenberg, chief economist at Merrill Lynch. "We had a dramatic overextension of credit and consumption growth for a long time."

In economics textbooks, such a rejiggering of economic forces happens in a nice straight line. In practice, it happens haltingly, with world markets on edge, day after day. Days like Thursday, full of jangled nerves and creeping panic.

Washington policymakers are trying to keep this adjustment of the world economy as orderly as possible, trying to prevent the economic undertow from hurting too many Americans.

In a survey released Thursday by the Wall Street Journal, 71 percent of economists said they think the nation is in recession.

The nation's top economic policymakers unveiled a far-reaching plan Thursday to fortify the U.S. financial system, calling for changes to nearly every segment of the credit markets and mortgage industry, including the creation of national standards for mortgage brokers, tighter oversight of credit-rating firms and stricter capital requirements for financial institutions making risky investments.

But the Bush administration and the Federal Reserve stress that they're not trying to prevent fundamental adjustments. Home prices need to come in line with fundamentals, as do spending and savings rates. Credit needs to become available at prices commensurate with risk.

"It's by no means all bad that the U.S. is slowing down," said Adam Posen, a senior fellow at the Peterson Institute for International Economics. "Because at some point we've got to repay all the debt we have accumulated."


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Take broad economic view, maybe you'll feel better 03/14/08 [Last modified: Friday, March 14, 2008 10:46am]
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