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Wednesday, October 27

It's only going to get worse before it gets worse

Chart

The chart above shows the deficit rose to a whopping US$166.2 billion for the second quarter of 2004. Annualized, that's $664.8 billion, or approaching 6.5% of US gross domestic product. As bad as this seems, it will probably get worse before it gets better. We are locked into a set of "daunting arithmetic", says Richard Berner, an economist with Morgan Stanley. He says, "The daunting arithmetic locks the current-account gap into a vicious circle that is hard to escape." Berner cites several reasons he thinks the deficit will get worse:1) Imports of goods, services and income are 40% bigger than exports. And this ratio is on the rise again.2) Higher US interest rates will increase debt payments to foreign debt holders.3) Iraq war and redevelopment.4) Slowdown in global growth, especially in Asia.5) Soaring cost of imported oil.

more

This is an amazing article. Crooks argues that the price of gold must go up to take attention away from the increased cost of oil. By extension, this implies one ounce of gold buys more US dollars - a devaluation of dollars against gold.



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