Tuesday, September 13, 2005

The myth of a global savings glut

C. P. Chandrasekhar
Jayati Ghosh

There is substantial agreement that international imbalances in growth and balance of payments performance are a source of global fragility. But disagreements persist on the source of those imbalances. C. P. Chandrasekhar and Jayati Ghosh discuss an effort to manufacture a global savings glut to cover up US responsibility.

THE revival of growth in the US when the rest of the developed world performs indifferently or poorly is a source of some surprise.

From around the mid-1970s the US has lost its competitiveness in commodity production, which has resulted in an increasing deficit in its balance of trade in goods.

Hence, despite a growing surplus till quite recently in its trade in services, the overall balance of trade in goods and services has been negative and sharply rising (Chart 1).

Growth triggers

Yet this weakness has now become the basis for the revival in growth. A concomitant of the loss of competitiveness has been the fact that the current account deficit of the US, which has to be financed with capital flows, has been widening in recent years, to touch a record $668 billion in 2004. This year, the US current-account deficit is forecast to widen even further to over $800 billion.

This massive increase in the current account deficit implies that despite its loss of competitiveness the US has been able to keep domestic demand rising. GDP growth which was down from 3.7 per cent in 2000 to 0.8 in 2001, rose to 1.9 per cent in 2002, 3 per cent in 2003 and 4.4 per cent in 2004. In June 2005, unemployment fell to 5 per cent, the lowest rate since September 2001.

It is now widely accepted that this buoyancy in domestic demand and the consequent growth in output and employment has been the result of a combination of deficit financed spending by the US Government and debt financed spending by American residents.

From a high of 6 per cent of GDP in 1992, the US fiscal deficit had declined continuously and turned into a budget surplus in 1998. The budget surplus rose to touch 1.3 per cent of GDP in 2000.

However, after the recession of 2001, the deficit climbed again to 4.6 per cent of GDP in 2003 and 4.3 per cent in 2004, which helped the recovery and the recent buoyancy.

But it was not merely government spending that was responsible for the revival, which was triggered by consumption spending by households as well. According to The Economist, on an annualised basis in June 2005, US households disposed of all but $1.9 billion (0.02 per cent) of the over $9 trillion in disposable income they earned. This obviously keeps retail sales going. Households save less and consume more, because the value of their wealth accumulated in the past has been rising. In particular, during the year ending March 2005 the value of their houses rose by $2.3 trillion, according to the Fed.

The housing boom is reflected in two tendencies. First, new residential investment at more than 6 per cent of GDP is at a 50-year high. And existing house sales, which peaked at just under 10 per cent of GDP in 1979, surpassed that level in 2002, and is now at over 13 per cent.

The former triggers demand for construction material and labour and has its multiplier effects. The latter pushes up prices and, through the wealth effect, triggers consumption spending, Home prices rose by almost 15 per cent in the year to June 2005, the fastest in decades.

Wealth effect

The wealth effect is not new to the US. During the years of the stock market boom of the second half of the 1990s, the relatively wider dispersion of direct and indirect stock ownership in the US implied a substantial increase in the wealth of American citizens. The consequent "wealth-effect", which encouraged individuals to spend because they saw their "accumulated" wealth as being adequate to finance their retirement plans, was seen as a major factor underlying the consumer boom and the fall in household savings.

A major factor responsible for the stock boom was the massive inflow of capital into the US during that period. Higher US interest rates, confidence in the dollar because of creditable growth and the "flight to safety" explained that flow of capital into the US. The same is not true today.

The deficit on the balance of payments has created a fear that the dollar may collapse and all efforts of the G-8 are geared to ensuring a "soft landing". Though the trade-weighted index of the dollar stabilised during early 2005 and even appreciated somewhat thereafter, it has once again been sliding and is currently still close to the low it reached at the end of 2004.

Further, US interest rates can hardly be considered high. Bond yields in the US are not only low by the standards prevailing since the early 1980s, but are far less than the rate of economic growth that they are expected to roughly reflect. Put all this together, and the US would not be considered a favoured and safe haven.

From borrowers to lenders

Yet capital has indeed been flowing into the US to finance the current account deficit. This must come from countries that were registering a surplus on their current account.

Consider for example 2003. In that year, 52 of the 126 countries for which data was available recorded surpluses on their current account, while 74 recorded deficits, with the US recording the largest deficit of $531 billion and Japan the largest surplus of $136 billion.

From the data it emerges that the surpluses of the top 17 surplus earning countries would have been necessary to cover the US deficit. The surpluses of these 17 countries accounted for as much as 86 per cent of the surpluses earned by the countries that recorded a surplus.

On the other hand, the US alone accounted for 72 per cent of the total deficit recorded by the 74 deficit countries.

Thus there is indeed a fundamental imbalance in the global balance of payments. But this imbalance does not just lie in the concentration of deficits and surpluses. It is also reflected in the fact that the US deficit was not being financed largely by the surpluses of other developed countries or, prior to the current spike in oil prices, by surpluses in the oil exporting countries.

While Japan and Germany are the two largest surplus earners, the surpluses of these two countries accounted only for 30 per of the aggregate surplus of all surplus earners and 35 per cent of the US deficit.

Even among these two, Japan accounts for $136 billion of their combined $188 billion surplus. Further, Germany's surplus of over $51 billion is implicitly being absorbed by deficits in other countries of the Euro area, with the surplus of the Euro area as a whole estimated at only $23.5 billion.

The net result of all this is that developing countries and countries in transition have become important sources of surpluses to finance the US deficit. If we take the top ten developing and transition economies in terms of the size of their surpluses, their aggregate surplus accounts for 39 per cent of the US deficit. If we leave out oil exporters and take the top 10 among the remaining developing countries, their surpluses account for 28 per cent of the US deficit. China's surplus alone accounts for 8.6 per cent of the US deficit, whereas net surpluses from the Euro area amount to only 4.4 per cent of that deficit. Developing countries have been even more important at the margin. As Federal Reserve Governor, Mr Ben Bernanke, has pointed out, the $548 billion increase in the US current account deficit between 1996 and 2004 was not matched by surpluses in the other industrial countries as a whole. The collective current account of the industrial countries declined by $441 billion between 1996 and 2004, implying that, of the $548 billion increase in the US current account deficit, only about $106 billion was offset by increased surpluses in other industrial countries.

The bulk of the increase in the US current account deficit was balanced by changes in the current account positions of developing countries, which moved from a collective deficit of $90 billion to a surplus of $326 billion — a net change of $416 billion — between 1996 and 2004.

It is because the surpluses of the rest of the world, especially the developing countries, was being "voluntarily" recycled to the US that interest rates there did not have to rise to attract capital to finance that country's rising current account deficit. Low interest rates in turn have helped finance the housing boom which, according to Mr Alan Greenspan, is not a speculative bubble but just "froth". Whether bubble or froth, most economists agree that the easy money that has financed it has been crucial to the economic recovery since 2001.

According to one estimate, housing has contributed over 40 per cent of employment growth since then. And housing expansion plus real estate inflation have accounted for 70 per cent of the increase in household wealth over this period. And this, as noted earlier, has triggered an expansion in consumer spending. Thus, capital inflows have once again helped finance growth in the US, even if mediated this time by the real estate rather than the stock market. The US, because of its political and military clout, has protected the dollar and sucked in capital from the rest of the work to crank its weakening economic machine.

Increased savings

Recently, however, Federal Reserve Governor took issue "with the common view that the recent deterioration in the US current account primarily reflects economic policies and other economic developments within the United States itself." In his view, a satisfactory explanation of the rapid rise of the US current account deficit requires a global perspective that takes account of the fact that "over the past decade a combination of diverse forces has created a significant increase in the global supply of saving — a global saving glut — which helps to explain both the increase in the US current account deficit and the relatively low level of long-term real interest rates in the world today." What accounts for this so-called global savings glut? According to Mr Bernanke, important among the reasons "is the recent metamorphosis of the developing world from a net user to a net supplier of funds to international capital markets." The shift, in his view, occurred because of developments in the developing countries themselves, especially the financial crises many of them faced since the mid-1990s. These crises are seen to have occurred because net capital imports into the developing countries in the early and mid-1990s were not always productively used but absorbed for the wrong reasons. In some developing countries, governments borrowed to finance budgetary deficits and avoid necessary fiscal consolidation. In other countries, these funds were not allocated to projects promising the highest returns because of "opaque and poorly governed banking systems".

The resulting loss of lender confidence, together with other factors such as overvalued fixed exchange rates and reliance on short-term debt denominated in foreign currencies resulted in financial crises that led to capital outflows, currency depreciation, sharp declines in domestic asset prices, weakened banking systems, and recession. Such was the experience, according to Mr Bernanke, in Mexico in 1994, in a number of East Asian countries in 1997-98, in Russia in 1998, in Brazil in 1999, and in Argentina in 2002

Thus the transformation of developing countries from net importers to net exporters of capital is seen as a voluntary or enforced response to these crises, created by wrong policies or institutional inadequacies in the developing countries. In the wake of the crises, these countries either chose or were forced into strategies that implied a current account surplus.

In practice there are two reasons why this could have occurred: crisis-induced deflation that restricted imports and generated current account surpluses or unusual success as an exporter of goods and/or attractor of foreign capital. While China and India may be countries that fall in the latter category, most other developing countries recorded surpluses because of deflation.

In fact, trends in the fiscal deficit in developing countries do suggest that an important reason why developing countries record a surplus on their current account is the deflationary fiscal stance adopted by their governments. Growth is curtailed through deflation so that, even with a higher import-to-GDP ratio resulting from trade liberalisation, imports are kept at levels that imply a trade surplus.

But going against the evidence, Mr Bernanke opts for the latter explanation, and argues that the outcome reflects conscious efforts to engineer a current account surplus in pursuit of a policy of reserve accumulation to deal with likely future capital outflows. This was ostensibly true of East Asian countries, such as Korea and Thailand, which began to build up large quantities of foreign-exchange reserves and continued to do so even after the capital inflows that had dried up after the crises were restored.

Even countries that had escaped the worst effects of the crisis such as China and India are seen to have built up reserves to serve as "war chests". It is for these reasons that developing countries have been transformed from borrowers on international capital markets to large net lenders.

However, the reasons for the reversal have been misread, leading to the "made in USA" perspective.

Flawed reasoning

This perspective is misplaced, because it is partly based on the "popular argument" that focuses on the burgeoning US federal budget deficit when explaining the decline in national saving and the rise in the current account deficit in the US. But that argument, in his view, cannot be sustained for two reasons: first, the US was recording a rise in current account deficit even during 1996 to 2000 when it was recording budgetary surpluses; second, there is no necessary relationship between a budget deficit and a current account deficit — countries such as Germany and Japan continue to run large current account surpluses despite government budget deficits that are similar in size (as a share of GDP) to that of the US.

What that ignores is that, the reason why a budgetary deficit leads to current account deficit is that the excess of government investment over government savings it implies is not matched by an excess of private saving over private investment or is accompanied by an excess of private investment over private saving that aggravates the deficit.

Such an excess of private investment over saving is what the housing boom financed by debt implies. American households are not saving enough to finance the country's investments.

Yet, using his "conclusion" Mr Bernanke builds a two-step argument to explain the US current account deficit.

First, while there is a necessary correspondence between the excess of investment over saving and the current account deficit, the causation really runs from the latter to the former. That is because there is a global savings glut, the US can sustain an excess of investment over saving. Second, the excess of investment over savings arises because of the effect that the savings glut has on interest rates, asset prices and exchange rates, although the pattern of asset-price changes was somewhat different before and after 2000, shifting from stock price inflation to real estate price inflation.

Thus the real argument is that the global savings glut creates the excess of investment over savings in the US. Between around 1996 and early 2000, it did this by affecting equity prices. The US was well placed to mediate these effects because of the development and adoption of new technologies that delivered increases in productivity, which together with low political risk, strong property rights, and a good regulatory environment, made the country exceptionally attractive to international investors during that period. As a result, "excess savings" flowed into the US.

According to Mr Bernanke, after 2000 global excess saving lowered interest rates, making it, rather than high equity prices, the principal cause of lower US saving. Low mortgage rates have supported record levels of home construction and strong gains in housing prices. The asset price effects of this housing boom has once again encouraged consumption spending, as the increase in housing wealth not only reduces the desire to save but provides access to credit to finance consumption.

Thus, events outside the US, especially the internally induced financial crises in emerging-market countries have, through their effects on equity values, house prices, real interest rates, and the exchange value of the dollar, widened the current account deficit in the US.

There, of course, remains the question as to why the current-account effects of the increase in desired global saving were felt disproportionately in the US relative to other industrial countries. Given his argument, Mr Bernanke cannot but point to the technology boom in the US and the ostensible "depth and sophistication" of its financial markets as factors that make it an attractive investment destination. But he too cannot ignore the role played by the status of the US dollar as the leading international reserve currency to explain why the saving flowing out of the developing world has been directed relatively more into dollar-denominated assets such as US treasury securities. However, what the first of the arguments manages to achieve is to obfuscate the puzzle as to why the dollar remains the reserve currency despite the loss of US competitiveness.

Unravelling the puzzle

If not obfuscated, the only way to unravel that puzzle would be to refer: i) to the crucial role played by US markets in the growth process of many countries, including China, India and much of East Asia; and ii) to the strategic and military dominance of the US and its aggressive expansionism. The first allows the US to demand a quid pro quo for access to its markets. The second provides the basis for the confidence that despite the widening current account deficit the US economy and the dollar are unlikely to experience a cumulative downward descent into recession.

In the event, the US Government faces no national budget constraint allowing it to use deficits to finance its global military misadventures and US households come to believe that they face no constraint in borrowing their way to prosperity in the belief that the notional values of their wealth, which rises because of speculation, will persist. As a result, the US experiences growth with a widening deficit, even when many other developed industrial economies are faced with slow growth or recession.

The problem of markets delivering unexpected outcomes, however, does not go away, since the possibility that the low interest rates that underlie the present situation may not continue. Interest rates can rise for two reasons:

First, foreign investors may fear that the dollar cannot continue to be sustained at anywhere near current levels and thus reduce their holding of treasury bonds and other dollar-denominated assets. The consequent decline in the prices of those assets would imply a rise in interest rates.

Second, any decline in the value of the dollar would trigger price increases because of the 16 per cent share of imports in US GDP. To deal with that price increase the Fed may have to raise interest rates. A rise in interest rates because of either of or both these causes can bring the housing boom to an end, lead to a sharp fall in consumption and precipitate a recession. This is the denouement that global managers in search of a "soft landing" have increasingly come to fear.

Sunday, September 04, 2005

Sink or swim? Heavy debt load makes Americans vulnerable to rising rates, foreign currency imbalances

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Images.com

Growing debt has long been a concern in the United States, from individuals buying on credit to Washington budgets. But many economists are now warning that runaway spending and borrowing have the nation on track toward a major economic crash.

By EILEEN ALT POWELL, Associated Press


Editor's note: Growing debt has long been a concern in the United States, from individuals buying on credit to Washington budgets. But many economists are now warning that runaway spending and borrowing have the nation on track toward a major economic crash. The second in a three-part series, this story looks at scenarios in which debt could cause a major economic setback.

NEW YORK — Buy now, pay later: It's been the mantra of American consumers for decades.

The results are obvious in the ballooning balances on credit cards and mortgage loans, and in the mushrooming U.S. trade deficit, which reflects the nation's nearly insatiable appetite for cheap, imported goods.

Low interest rates, especially since the end of the 2001 recession, have fed the debt beast at home, allowing American consumers to accumulate nearly $11 trillion in debt as they buy more homes, more cars, more clothes, more dinners out. At the same time, foreign investment in the United States is helping to keep the dollar strong, which holds down prices on those imports that Americans covet.

But what would happen if interest rates suddenly weren't so benign, or if foreign governments, corporations and individuals stopped investing so heavily in America? Some analysts fear such actions could trigger doomsday scenarios in which the bills come due and Americans can't pay, with devastating consequences for the entire economy.

The Associated Press asked some experts to discuss what could burst the debt bubble in three areas that appear most vulnerable, and to offer a rebuttal from the perspective of people who believe that while the country may be in debt, it's not in danger.

Credit card crunch

The tool that has made it ever so easy for Americans to buy and buy and buy is the credit card. And buy they have.

Outstanding balances on credit cards have risen to more than $800 billion, or some $7,200 per U.S. household. That's the equivalent of three plasma TVs, or 24 iPod digital music players, or more than 1,200 Big Mac meals.

It's more than double the indebtedness of a decade ago — and it doesn't include an additional $1.3 trillion in debt for cars, appliances and personal loans.

With the savings rate hovering near all-time lows, most consumers don't have reserves, and so they're vulnerable to an economic shock.

What if interest rates suddenly shot up, say 3 percentage points or 4 percentage points, requiring burdened borrowers to greatly increase the amounts they have to pay each month on their debt?

"It would undermine the housing market, and could quickly result in credit problems that would affect the entire (American) financial system," says Mark Zandi, chief economist at Economy.com, a forecasting firm in suburban Philadelphia.

Such an event isn't beyond the realm of possibility if global investors, for instance, lose confidence in the U.S. economy and quickly shift their money elsewhere, or if a terror attack riles financial markets.

Some American borrowers already are in trouble, contributing to a sharp rise in bankruptcy filings. Howard Dvorkin, head of Consolidated Credit Counseling Services Inc. in Fort Lauderdale, warns that many more could be capsized soon.

As the Federal Reserve continues to push interest rates higher, the rates on many of the nation's cards are going up in lockstep. Meanwhile, banks are raising minimum payments, in some cases doubling them. And starting in October, a new bankruptcy law will make it much harder for consumers to be relieved of their debt.

"You'll see creditors get more aggressive at collecting debt, the reason being that they can," Dvorkin says.

That will turn many borrowers into "the walking wounded," struggling to keep up with card payments and limited in what they can buy — a massive drag on the U.S. economy.

Robert Manning, a humanities professor at the Rochester Institute of Technology and author of "Credit Card Nation," fears the rising debt burdens will have a tremendous social impact, too.

"We're looking at the possibility that millions won't be able to retire, that they'll have to work well into their 70s" as they juggle their debt, he says.

The Rebuttal: Skeptics don't see a big economic shock in the offing, arguing that doomsayers have warned for years that the sky is falling. Economy.com's Zandi says interest rates are most likely to go up at a measured pace, giving most consumers time to adjust to higher payments, and they may see their credit limits cut.

Still, much of the debt in recent years has been taken on by lower-income and lower-middle-income families, who borrowed aggressively to maintain their standard of living as wages stagnated. "Going forward it will be harder for them to maintain their spending — and their living standards," Zandi says.

Since the U.S. economy counts on consumer spending for two-thirds of its output, that translates to "living with slower growth" in the future, he says.

Mortgage mania

Americans have taken on more than $8.8 trillion in mortgages to buy homes and apartments, up an astounding 42 percent since the 2001 recession. By most reckoning, this is "good" debt because consumers are investing in appreciating assets — and they get a tax break on interest payments to boot.

The fast run-up in prices in recent years has made many homeowners feel wealthy, so they can ramp up day-to-day spending.

But wait: Millions of Americans have taken advantage of low rates in recent years to refinance their mortgages, with as many as eight in 10 in some quarters taking on larger loans so they can cash out some of their equity, according to mortgage giant Freddie Mac in McLean, Va.

And wait again: Borrowing against home equity rose to a record $715 billion last year, and it's projected to rise more this year, according to SMR Research in Hackettstown, N.J.

Why does that matter? Because the more home equity Americans tap now, the less they'll have in reserve for retirement or for emergencies.

The run-up in home prices — what Federal Reserve Chairman Alan Greenspan has described as "froth" — increasingly looks like a bubble.

"The bigger bubble is actually in the financing of homes," says economist Ed Yardeni of Oak Associates in Akron, Ohio. "Mortgage lenders have loosened their lending standards. Rather than telling a lot of would-be buyers, particularly in places like California, that they don't qualify, they're coming up with all sorts of so-called innovative alternative financing."

So millions are buying homes with no down payments. Or they have adjustable-rate mortgages or interest-only mortgages or optional payment mortgages.

What brings such a great party to an end?

"Interest rates going up just 2 percent would do it," says Peter Morici, a business professor at the University of Maryland in College Park. That, he says, would suppress prices, lower sales and put a real squeeze on those who were marginally qualified to buy because their payments would suddenly go up.

"Some people will lose their homes," Morici says. "Many people will just be hurting."

One mortgage insurer, The PMI Group, Inc. of Walnut Creek, Calif., believes the party is closer to last call in some cities than in others.

PMI's most recent quarterly survey found that the risk of home price declines has increased in 36 of the nation's 50 largest markets, with the danger greatest in Boston, New York's Nassau and Suffolk counties and the California cities of San Diego and San Jose.

"What we're seeing in the riskiest areas — especially California and the Northeast — is that home prices are going up faster than local incomes, so homes become less affordable," a PMI Group report says.

The rebuttal: Doug Duncan, chief economist for the Mortgage Bankers Association trade group in Washington, D.C., acknowledges that there may be "tiny bubbles," particularly in areas such as Las Vegas and along both coasts, where speculators are rushing in to buy property and flip it quickly for a profit.

"It's the mentality of, 'We're watching our friends get rich in real estate, and we want some. So we put money down on six condos in Tampa,'" Duncan says.

Yet he believes most buyers see their homes as a place to live or to retire, with appreciation as "the frosting on the cake."

Duncan also believes the Fed is sensitive to the potential impact higher rates could have on the housing market. "The Fed has to be asking the question, 'If there's decline in equity in the housing sector, to what extent does that affect overall consumption?'" he says.

That argues for more of the plodding, quarter-point interest rate hikes the Fed has favored for the past year, not a rapid run-up in rates.

International money mart

Why is everyone so worried about China?

The reason, explains the University of Maryland's Morici, is because "we're getting their T-shirts — and the money to buy their T-shirts."

China's growing exports to the United States are a major factor in the explosion of the nation's trade deficit, which could exceed $700 billion this year. At the same time, China is one of the largest foreign investors in U.S. Treasury securities, with its holdings of $244 billion, second only to Japan.

The Chinese buy American bonds — and make other investments in the United States — because they need to recycle the dollars they earn from their exports. China also has bought dollars to keep its own currency, the yuan, lower in value so its exports are more price-competitive internationally. That gives the U.S. government more cash to spend, both domestically and abroad.

Such investment in the United States by foreign powers, however, also means that "U.S. financial vulnerability continues to grow," Lehman Brothers analysts John Shin and Ethan S. Harris say in a research report. Their concern is that American efforts to slow Chinese imports, perhaps by imposing quotas, could trigger retaliation from China.

If China stopped buying U.S. securities, or even started dumping them, it would send the dollar into a tailspin. That, in turn, would push interest rates up in America and make imports more expensive, fueling inflation.

A rapid rise in interest rates could also bring the housing and mortgage booms to a quick end, possibly tipping the U.S. economy into recession.

The rebuttal: C. Fred Bergsten, a former U.S. Treasury official who heads the Institute for International Economics in Washington, D.C., notes that China said in July it would no longer peg the yuan strictly to the dollar but to a basket of currencies and allow its currency to rise gradually in value. That reduces the chance of a jarring turn away from the dollar, though China's purchase of dollar-denominated securities could slow.

Even without that announcement, Bergsten thinks it "would be crazy" for China to alienate the United States. The reason: China needs Americas as a major export market to fuel its own economic growth and to create jobs.

That doesn't mean the dollar is entirely safe. A burst in the housing bubble, a sharp drop in the stock market or a recession could prompt foreigners to cut back on U.S. investments, too. But Bergsten sees the odds of such a crash as low.

There have, of course, been any number of doomsday predictions in the past that didn't come true. But a number have.

Many Americans are too young to remember that the Great Depression was the result of a bubble bursting when a panic in the market caused the crash of stocks, real estate and commodities that had been bought by speculators with borrowed money.

More recently, in the late 1990s, investors bid the stocks of technology companies so high — even those without any profits — that prices couldn't be sustained and the market crashed in 2000, triggering a national recession. The stock market still hasn't fully recovered.

A recent study by analysts at the Bear Stearns & Co. Inc. investment bank in New York says most bubbles share the same characteristics: A strong economy and a sense of prosperity leads to speculation, which leads to price pressures and a rise in interest rates that can lead to the bubble bursting.

The analysts — Francois Trahan, Kurt D. Walters and Caroline S. Portny — believe that at least eight of the 10 characteristics of a bubble environment currently exist in America. But they are not surprised that few see it: "The idea that a financial disaster could occur at any moment is too far-fetched for individuals to imagine during times of such heightened exuberance."

Saturday, September 03, 2005

In the twilight of the great Dollar standard

IN THE TWILIGHT OF THE GREAT DOLLAR STANDARD
by Addison Wiggin

American consumers face the specter of losing value in their retirement savings, finding out they cannot live on a fixed income, and suffering from chronic hyperinflation. These changes are unavoidable. But there are steps that smart investors can take defensively to escape from their vulnerability to the dollar's inevitable fall.

Any number of things could create a sudden, wrenching drop in the dollar's value. Consider the following three possibilities:

1. Foreign countries drop their U.S. dollar reserves. We depend on foreign investment in our currency to bolster its value or, at least, to slow down its fall. When that thinly held balance changes, our dollar loses its spending power.

2. Oil prices increase catastrophically. We-and our real inflation rate-are at the mercy of Middle East oil. Imagine what would happen if the price of oil were to double. Or triple. Our vulnerability is not imaginary. We are all aware of our vulnerability and dependence on oil, but we don\'t like to think about it. If oil prices do rise, it will affect not only what you pay at the pump, but many other prices as well-nonautomotive modes of travel, the cost of utilities, and local tax rates, for example.

3. The double whammy of trade and budget deficits. We\'re living beyond our means. It\'s as simple as that, and something is going to give. The federal budget deficit-annual government spending that is higher than tax revenues-adds to the national debt at a dizzying rate, making our future interest burden higher and higher every day. Our trade deficit-bringing more things in from foreign countries than we sell to the same countries-has turned us into a nation of spendaholics. We\'ve given up making things to sell elsewhere, closed the store, and gone shopping. But we\'re not spending money we have. We\'re borrowing money to spend it. Any head of a family knows that this cannot go on forever without the whole thing falling apart-and yet, that is precisely what we are doing on a national scale.

Even as our economy burns, our political leaders fiddle. They point to economic indicators to prove that our economy is strong and getting stronger. This information would be valuable . . . if only it were true.

Politicians like to measure the economy with esoteric indicators. For example, we are told that consumer confidence is up. Well, confidence is all well and good, but what if it isn\'t accurate? Yankee optimism has achieved a lot in the past 200 years, but it alone is not going to prevent the current dollar crisis from getting worse and worse.

Does this mean that the United States is finished? No, but it does mean that our long history of economic power and wealth is being eroded from within. For example, look at how the reality has affected you in recent years. For most people, the real state of our economy is measured in one way: jobs. Sure, the number of jobs rises every month, but the truth is not as reassuring. We are losing high-paying jobs in manufacturing and replacing them with low-paying jobs in health care, retail, and other menial job markets.
2. Oil prices increase catastrophically. We-and our real inflation rate-are at the mercy of Middle East oil. Imagine what would happen if the price of oil were to double. Or triple. Our vulnerability is not imaginary. We are all aware of our vulnerability and dependence on oil, but we don't like to think about it. If oil prices do rise, it will affect not only what you pay at the pump, but many other prices as well-nonautomotive modes of travel, the cost of utilities, and local tax rates, for example.

3. The double whammy of trade and budget deficits. We're living beyond our means. It's as simple as that, and something is going to give. The federal budget deficit-annual government spending that is higher than tax revenues-adds to the national debt at a dizzying rate, making our future interest burden higher and higher every day. Our trade deficit-bringing more things in from foreign countries than we sell to the same countries-has turned us into a nation of spendaholics. We've given up making things to sell elsewhere, closed the store, and gone shopping. But we're not spending money we have. We're borrowing money to spend it. Any head of a family knows that this cannot go on forever without the whole thing falling apart-and yet, that is precisely what we are doing on a national scale.

Even as our economy burns, our political leaders fiddle. They point to economic indicators to prove that our economy is strong and getting stronger. This information would be valuable . . . if only it were true.

Politicians like to measure the economy with esoteric indicators. For example, we are told that consumer confidence is up. Well, confidence is all well and good, but what if it isn't accurate? Yankee optimism has achieved a lot in the past 200 years, but it alone is not going to prevent the current dollar crisis from getting worse and worse.

Does this mean that the United States is finished? No, but it does mean that our long history of economic power and wealth is being eroded from within. For example, look at how the reality has affected you in recent years. For most people, the real state of our economy is measured in one way: jobs. Sure, the number of jobs rises every month, but the truth is not as reassuring. We are losing high-paying jobs in manufacturing and replacing them with low-paying jobs in health care, retail, and other menial job markets.

Our mantra of "Yankee ingenuity can accomplish anything" is gradually being replaced with a new mantra: "Would you like fries with that?"

Regards,

Addison Wiggin
The Daily Reckoning

Editor\'s Note: Each month, Addison, along with some of the greatest investment minds in the world, meet to debate gold, technology, oil, natural gas, penny stocks and real estate. It is during these secret meetings that most profitable investment ideas that we publish are born. Now, for the first time ever, Addison is opening these gatherings to the public - but only to a select few, and only for a limited time...

The Birth of an Elite Insider\'s Club

Our mantra of "Yankee ingenuity can accomplish anything" is gradually being replaced with a new mantra: "Would you like fries with that?"

Regards,

Addison Wiggin

Ways you can help victims of Hurricane Katrina

Miami Herald

TO DONATE MONEY:

(Specify donations for victims of Hurricane Katrina.)

American Red Cross: 800-HELP-NOW or http://www.redcross.org

BankAtlantic's 78 stores are collecting donations for the American Red Cross. Participants can donate at the teller line or through the Totally Free Change Exchange machines and assist those in need.

Broward County: Broward County Call Center is providing information to those who wish to donate, 954-831-4000 or visit the county website at www.broward.org.

Catholic Charities: 800-919-9338 or http://www.catholiccharitiesusa.org

City of Hollywood: Hollywood has established a disaster relief fund for victims of Hurricane Katrina. Employees and citizens who wish to donate money may make checks payable to ''City of Hollywood Emergency Relief.'' All donations will be given to the American Red Cross. Donors can mail their check to: City of Hollywood Emergency Relief Fund, PO Box 229045, Hollywood, FL 33022. Donors may also drop off their checks at Hollywood City Hall, Office of Community and Public Relations, 2600 Hollywood Blvd., Hollywood, FL 33022

Hollywood MDA Boot Drive: A portion of the money raised during the annual Labor Day weekend MDA Boot Drive will be donated to Hurricane Katrina Disaster Relief.

Hollywood Firefighters will be at the following locations today, Sunday, and Monday:

Sheridan Street and A1A, 9 a.m. to noon; 2 p.m. to 5 p.m.

Hollywood Boulevard and 441, 9 a.m. to noon; 2 p.m. to 5 p.m.

Stirling Road at Oakwood Plaza, 9 a.m. to noon; 2 p.m. to 5 p.m.

Publix at 50th and Sheridan Street, 9 a.m. to noon; 2 p.m. to 5 p.m.

Stirling Road at the Hard Rock Hotel & Casino, 7 p.m. to 9 p.m.

Salvation Army: 800-SAL-ARMY or www.salvationarmyusa.org. Checks can be mailed to the Salvation Army Disaster Relief, PO Box 270848, Tampa, FL 33688-0848 or local office, PO Box 350370, Miami, FL 33135-0370.

The Greater Miami Jewish Federation: 1-305-576-4000 or http://www.jewishmiami.org/pledge.cfm

The Miami Herald, El Nuevo Herald and the United Way of Miami-Dade have activated Operation Helping Hands to help Gulf hurricane victims: 800-226-3320 or http://www.iwant2help.org

CBS4's Neighbors 4 Neighbors, a nonprofit organization, is collecting funds: 305-597-4404 or http://www.cbs4.com and follow link for Neighbors 4 Neighbors website. Checks can be written to Neighbors 4 Neighbors and mailed to: WFOR-TV, CBS4, 8900 NW 18th Terrace, Miami, FL 33172. Donors can designate victims in Gulf Coast or South Florida.

Palmetto Bay at Village Hall, 8950 SW 152nd St. For more information call: 305-259-1234.

Pinecrest at Village Hall, 12645 Pinecrest Pkwy. Pinecrest officials also are encouraging people to donate online at the following website: http://www.networkforgood.org/ topics/animal_envi

ron/hurricanes/

United Way of Broward County: Hurricane Katrina Relief Fund, United Way of Broward County, Ansin Building, 1300 S. Andrews Ave., Fort Lauderdale, FL 33316.

TO DONATE FOOD, WATER, SUPPLIES:

Adrian's Hair Center, 1920 E. Oakland Park Blvd. in Fort Lauderdale, is a designated drop-off location for people who want to donate items to help the victims of Hurricane Katrina. Donations of new items, underwear, personal hygiene and non-perishable food will be accepted from 9 a.m. to 5 p.m. Tuesday through Friday. Call 954-396-3700.

American Muslim Association of North America: 305-898-9314 or http://www.al-almana.org

Aventura, Biscayne Corridor, Miami Gardens, Opa-locka and North Dade Regional Chambers of Commerce: Collection center 1300 NW 167th St., Suite 1, Miami Gardens. Call 305-690-9123.

Food for the Poor: Accepting donations and hygiene kits; 9 a.m.-4:30 p.m. weekdays at 500 SW 12th Ave., Deerfield Beach; for details, 888-505-7400 or www.foodforthepoor.org.

Hallandale Beach: Accepting any non-perishable foods and supplies at Peter Bluesten Park, 501 SE First Ave., the Cultural Community Center, 410 SE Third St., the Austin Hepburn Center, 750 NW Eighth Ave., Hallandale Beach Fire Rescue's main station, 121 SW Third St., and the city's police department, 400 S. Federal Hwy.

Hollywood: The Department of Agriculture is sponsoring a food drive beginning next week. Donations can be dropped off at the Millennium Mall at the corner of U.S. 441 and Hollywood Boulevard. Additionally, volunteers will be needed to assist in packing the donated items for transport to the affected areas. If people wish to assist with the packing, they are asked to call Bill Sherwood at 954-922-4482.

State Sen. Mandy Dawson, D-Fort Lauderdale, and the Fort Lauderdale NAACP Youth Council will collect nonperishable goods and other items for victims of Hurricane Katrina in Louisiana at 3 p.m. today at the Rev. Samuel Delevoe Park, 2520 Sistrunk Blvd., Fort Lauderdale. Several items are needed including money, bottled water, blankets and sheets, pillows, toiletries and more. The event wraps up at 5 p.m. Dawson's office will pay for gas for anyone willing to lend their trucks to carry these items to Louisiana. Call 754-366-3735 or 954-347-0138 for information.

United Way of Broward County: For information on donating food or running a food drive, please call 954-462-4850. Donations can be sent to: Hurricane Katrina Relief Fund, United Way of Broward County, Ansin Building, 1300 S. Andrews Ave., Fort Lauderdale, FL 33316.

Other Agencies/collection points (monetary donations only):

Christian Contractors Association: 800-278-7703, 2009 S. Broad St., Brooksville, FL 34604. On the web at www.ccaministry.org. Church World Service, 1-800-297-1516, P.O. Box 968, Elkhart, IN 46515. On the Web at www.church worldservice.org.

Convoy of Hope: 800-988-0664 or 417-823-8998, 330 S. Patter son, Springfield, MO 65802. On the Web at www.convoy ofhope.org.

Emergency Animal Rescue Services (the disaster rescue program of United Animal Nations): 916-429-2457, P.O. Box 188890, Sacramento, CA 95818. On the Web at www.uan.org.

Episcopal Relief and Development/U.S. Hurricane Relief Fund: 800-334-7626, ext. 5129, P.O. Box 12043, Newark, NJ 07101-5043. On the Web at www.er-d.org.

Florida Baptist Convention: 800-226-8584, Attention: Baptist Men's Department, Hurricane Disaster Relief, 1230 Hendricks Ave., Jacksonville, FL 32207.

Florida Conference United Church of Christ: 407-835-7501, 924 N. Magnolia Ave., Suite 250, Orlando, FL 32803.

Florida Marlins: Collecting for South Florida Red Cross; Dolphins Stadium during games against the New York Mets (today-Sunday); www.floridamarlins.com.

John the Baker Italian restaurant: 12592 Pines Blvd., Pembroke Pines; 954-431-4315.

Las Olas Labor Day Art Fair: Donations to benefit American Red Cross; 10 a.m.-6 p.m. Saturday, 10 a.m.-5 p.m. Sunday; Las Olas Boulevard between Southeast Sixth and 11th avenues, Fort Lauderdale.

Lowe's: Monetary donations collected at all stores for American Red Cross.

Lutheran Disaster Response: 800-638-3522, 8765 W. Higgins Rd., Chicago, IL 60631. On the Web at www.elca.org.

Mennonite Disaster Service: 717-859-2210, 1018 Main St., Akron, PA 17501. On the Web at www.mds.

mennonite.net.

Pembroke Pines: Make checks payable to City of Pembroke Pines for the benefit of Hurricane Katrina Relief Fund; send to Pembroke Pines City Hall, 10100 Pines Blvd., Pembroke Pines, FL 33026; checks can be dropped off at police and fire departments, Parks and Recreation Centers, Southwest Focal Point Senior Center, Public Services Department and Pembroke Pines Charter Schools; 954-435-6505.

Presbyterian Church: 800-872-3283, Attention: PCUSA, Individual Remittance Processing, PO Box 643700, Pittsburgh, PA 15624-3700. Write on check: 000169. On the Web at www.pcusa.org.

Publix: Donations at checkout registers to benefit American Red Cross.

Seminole Paradise at the Seminole Hard Rock Hotel & Casino: Donations will benefit the Red Cross. Merchants are offering free gifts in exchange for donations on Saturday and Sunday, Sept. 9-11 from 6 to 11 p.m. each night.

United Jewish Community of Broward County: Cash donations; 5890 S. Pine Island Rd., Davie, FL 33328; www.jewishbroward.org; 954-252-6900.

United Methodist Committee on Relief: 800-554-8583, 475 Riverside Dr., Room 330, New York, NY 10115. Use advance 982410. On the Web at www.umcor.org.

Wal-Mart and Sam's Club: Donations accepted at all stores and online at www.walmart.com, www.samsclub.com

Winn-Dixie: Donate at checkout registers to benefit American Red Cross.

VOLUNTEERS:

American Red Cross: 954-797-3847.

United Way of Broward County: Volunteer Broward is continuing to recruit and deploy volunteers to help with local relief efforts. Individuals can register to volunteer by calling 954-522-6761.

The American Hospital Association is working to coordinate how AHA members can best help. For information and offer services visit www.HospitalReliefEffort.org.

Broward County residents looking for information on a variety of agencies providing assistance visit www.broward .org or VolunteerBroward can be reached at 954-522-6761.

The Broward County Call Center is also providing information for those who wish to donate at 954-831-4000.

CONSERVATION

Broward County is urging people to conserve energy:

Thermostat settings for energy conservation are 78 degrees when you are home and 85 degrees or off while you are away.

The movement from ceiling or room fans helps cool the air, but use them only when you are in the room.

Avoid running large household appliances such as washers, dryers and electric ovens during peak hours (5-9 a.m. and 4-7 p.m.).

Reduce the operating time of your pool pump and automatic sweeper to four to five hours, and only during off-peak time.

Use warm or cold water setting for washing your clothes and run full loads only. Always use cold water to rinse clothes.

Run dishwashers with full loads only. Turn off machine at the dry cycle and air dry dishes.

Replace air-conditioner filters monthly for maximum benefit. Dirty filters restrict airflow and can cause the system to run longer.

Weather-strip, seal and caulk leaky doors and windows.

Close shades and blinds during the day to reduce the amount of heat gained through windows.