At Arm's Length - A Daily Market Commentary - Before the Bell Rings Financial Commentary about Money, Investing, and How It Affects the Average Investor

At Arm's Length: 10.25.04

When a boxer is backed into the corner, the first reaction is to try and spin, maneuvering to get away from the opponent. When that same boxer is sitting in his corner after a long fight, the next round looming as the seconds tick away, he can only think one or two things. What he will do during the next round and/or how he will survive.

Now consider the U.S. position on the international front. We have given our best effort at trying to shape international monetary diplomacy, suggesting that selling our spend-spend lifestyle to overseas investors is a good investment for all concerned. That has become more difficult in recent weeks and especially among countries that not only espouse saving but find it wound throughout the intricate fabric of their own culture.

Cracks in the faith and good credit backing of the United States, while not yet evident are beginning to cause concern. The continued interest in buying dollars and U.S. debt will be something that will maintain its current decline until the U.S. can find some reason to justify their actions. Asian buyers of U.S. currencies have an interest in keeping the dollar depreciated and the interest rate low here at home . It benefits their currencies and makes their products affordable.

Which can explain the widening trade deficits. Referred to as a financially symbiotic relationship, any suggestion that should the host might no longer need the parasite, the relationship will end. Despite our notions of economic grandeur as we quickly apporach third world status, we are the parasite in this relationship with far more to lose than the Asian nations acting as the conduit for our financial nourishment.

Can this relationship somehow meet halfway or change significantly? Not likely. The current savings rate in this nation has fallen below the 1% mark. The likelihood that this will suddenly change - or even gradually change - from a spender and borrowing mentality to a savings focused economy is not about to happen under the Bush administration. Any slow down will have to be under a new regime with new, further reaching policies that would be very unpopular.

Something will force the change and it had better be us. If not, the overseas appetite for foreign dollars will continue to wane. The only scenario we can hope for will be a gradual pull back of interest in ourchasing U.S. debt. Anything sudden and consequently sharper will create chaos in the international markets. But more importantly, it will lay bare our inability to compete in the same ring as other nations, making our odds of winning any financial boxing match not worth the bet.

The previous week's articles.

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