posted 12-22-2003 10:51 PM            

ANYONE WANT TO GUESS HOW SERIOUS THIS IS?

IT EFFECTS EVERYTHING.

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Dollar's drop becomes more ominous

Sunday December 21, 05:53 PM

http://uk.news.yahoo.com/031221/325/ehl5i.html

NEW YORK (Reuters) - After months of looking at nothing but the bright side of a weaker dollar, investors are starting to look at the dark side of its struggle against the euro.

Demand for the dollar has been dampened by concerns about the widening U.S. current account deficit and expectations that benchmark U.S. interest rates will remain low.

For most of the past six months, that was seen as positive for the most part, as U.S. goods and services become cheaper compared with those produced overseas. Now though, investors are looking at the pace of the dollar's decline, fearing that an orderly drop in demand may turn into a rout.

Indeed, this past week, several large companies said the weak dollar continues to be a boon to corporate results:

* On Monday, Illinois Tool Works Inc (NYSE: ITW - news) ., whose products include fasteners, Wilsonart laminates and Hobart food equipment, boosted its fourth-quarter earnings outlook and said the weaker U.S. dollar added 5 percent to its revenue;

* General Mills Inc (NYSE: GIS - news) . said on Wednesday its quarterly sales rose 4 percent, to $3.06 billion, with most of the gain due to the weaker dollar, which boosts the value of sales in other currencies.

* Also, on Wednesday, Commercial Metals Co (NYSE: CMC - news) ., which makes steel products, said its fiscal first-quarter profit more than quintupled, citing the weak dollar and continued strong demand from Asia, especially China.

* On Thursday, Nike Inc (NYSE: NKE - news) . said currency market swings, primarily a surge in the euro against the dollar added $30 million or 7 cents per share to Nike's bottom line for its fiscal second quarter.

ABANDON SHIP

Even with all these positives, some investors remain concerned.

"It's not the level that concerns me, but how the rapid change affects commerce and the willingness of foreigners to hold and purchase dollar-denominated securities," said Jim Luke, a money manager with Raleigh, North Carolina-based BB&T Asset Management Inc., which oversees $13 billion.

Any rapid change in currency makes it hard for companies to price cross border deals, Luke said, stifling sales.

Worse, if foreign U.S. investors start to abandon dollar-denominated securities on concerns that any profits will be lost as they convert back to their own currencies, U.S. investors may also take money from the stock market in a bid to beat the rush.

"If the dollar's slide is seen as transient, then the market will stabilise as investors realise the damage has been done," said Anthony Chan, senior managing director and chief economist at Banc One Investment Advisors, which oversees $180 billion. "But not even domestic investors are blind and they don't want to be in front of the train."

DOOMSDAY SCENARIO

Few are expecting such a doomsday scenario, but with the dollar at a seven-year low against the Swiss Franc, an 11-year low against the British Pound and the euro enjoying an 18 percent gain this year, investors are hoping that the dollar is closer to the bottom than not.

If that reluctance to hold U.S. securities spreads to U.S. Treasuries, interest rates will also rise, potentially jeopardising the economic recovery.

Another fear is that the strengthening global economy will make it harder for the U.S. to fund its current account deficit as investors move into strengthening currencies and cyclical economic regions like Asia.

The U.S. also faces a unique problem in that commodities such as oil and base metals are priced in U.S. dollars.

Steven DeSanctis, small-cap strategist with Prudential Equity Group said his biggest concern is that oil prices can stay high in dollar terms, as people outside the U.S. are effectively paying less.

Economies using the euro will see lower energy costs and a lift in their economies, but in the U.S. -- the world's largest consumer of oil -- companies will see profits erode.

Inflation may also revive as a factor as with imports more expensive, local companies feel freer to boost the prices of their goods in the U.S. market without worrying about a decline in sales, DeSanctis said.

SILVER LINING

In the near term, it is still the silver lining that predominates as the dollar weakness is expected to add about 2 percent, to fourth-quarter earnings for Standard & Poor's 500 companies, according to Ken Perkins, a market analyst at Thomson First Call.

The fear, however, remains that as the effects of historically low interest rates and tax cuts wind down, the dollar's decline will prove more problematic than beneficial.

posted 12-22-2003 11:30 PM            

http://www.salon.com/news/wire/2003/12/20/budget/index.html

Analysts Say Future Budget Outlook Gloomy
By Alan Fram
Salon.com

Saturday 20 December 2003

Keeping the federal budget at or near balance over the next 50 years could require painful tax increases, spending cuts or both, the Congressional Budget Office says.

In a look at the government's long-term budget outlook, Congress' nonpartisan fiscal analyst offered possible combinations of tax and spending changes, all of which would leave lawmakers choosing among politically unpalatable options.

Even so, some still would leave the government in fiscal peril. Yet, failing to act would drive the accumulated federal debt to unsustainable levels, said the study, released Friday.

"Taken to the extreme, such a path could result in an economic crisis," including the possibilities that foreign investors would pull out, the dollar's value plunge, interest rates and prices soar and stock markets collapse.

"The longer that lawmakers delay acting to counter an unsustainable budgetary situation, the larger the spending cuts or tax increases will eventually have to be," the 60-page study warned.

The big problem facing the government is the impending retirement of the baby boom generation, whose 76 million members will start later this decade relying on Social Security and Medicare and increase their use of Medicaid.

The budgets for those automatically paid benefits are also growing as medical costs continue to soar. The three programs provide pensions and medical insurance for the elderly, disabled and poor.

Social Security is so large, and Medicare and Medicaid are expanding so rapidly, that limiting the growth of defense, education and other spending that Congress controls would not be enough for sound budget policy, the report said.

"Substantial reductions in the projected growth of spending or a sizable increase in taxes as a share of the economy -- or both -- will probably be necessary to provide a significant likelihood of fiscal stability in the coming decades," the report said.

The study compared current and future spending and revenues to the size of the U.S. economy, now about $11 trillion. Economists consider the resulting percentage a useful way to measure the federal budget over time, because it illustrates how affordable particular programs or policies might be.

In the study, the budget office offered six hypothetical scenarios for restraining spending and raising taxes through 2050.

Highlighting how dire the long-range budget picture is, even the scenarios that let trillions of dollars in tax cuts enacted under President Bush expire, which would bring in piles of new revenue, would mean that "fiscal stability is not assured."

Of the six scenarios, three offered the chance of balanced budgets in 50 years.

But of the three, two used the politically unlikely assumption that the Bush tax reductions would expire. The third incorporated the improbable scenario that spending for Medicare and Medicaid would not keep pace with health-care costs, that spending for other benefits would shrink compared to the economy's size, and that other domestic programs would grow only with inflation.

In another scenario, revenues would rise from their current 16.2 percent of the economy to their historic 18.4 percent average, and spending for all programs but Social Security, Medicare and Medicaid would be less than half their current 9.6 percent of the economy. But "to prevent an indefinite spiraling of federal debt," spending on those three benefit programs would grow by no more than 0.5 percent annually over inflation, the report said.

The report's conclusions echoed numerous similar studies that have been done in recent years. But coming just as the calendar is to turn to a presidential and congressional election year, both parties tried using it to buttress their arguments for their favored budget policies.

"If spending is left unchecked, it could have a disastrous effect on the economy," said Rich Meade, Republican staff director of the House Budget Committee. "The bottom line is deficits do matter, and we need to address them."