3/15 FHPN Goldman profit, US trade deficit both records, end-result of 30-year rise of speculative finance
"FHPN," "Fair, Honest, Principled News," is a regular feature which gives links and excerpts from selected recent key stories, often focused on a single theme, with my bold italicized comments. 3/11 "Digests of my previous posts for busy people" link gives blog's core ideas.
This edition of FHPN juxtaposes record-breaking profits at Goldman Sachs with record-breaking current account deficits for America, Inc., further exacerbating rising economic tensions with China, with my comment at the end of the blog. The 3/14 edition of FHPN focused on climate change and water wars link.
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3/14 Reuters "Goldman Sachs profit soars to record" link "Goldman's record trading revenue, accompanied by one of the busiest periods for mergers and acquisitions ever, resulted in record revenue and earnings ... "There were a lot of good things in currencies, in commodities and many credit products. Goldman also has the greatest presence in non-U.S. markets and those markets are growing exceptionally fast." ... [CFO] Viniar said. "We are seeing strategic deals with a frequency and on a scale not witnessed in six years." ... "The business continues to grow, it's more diversified and, more importantly, it's growing around the world," Viniar said."
3/14 IBD "Goldman Sachs Net Shoots Past Views; Signal For Market?" link "It's a good sign for stocks overall when financials, especially Wall Street firms, are among the market leaders. Strong M&A activity and heavy trading volume suggest companies and investors are optimistic. Also, financials are still the biggest group in the S&P 500, representing 21% of the index's market cap and 26% of its earnings ... "One of the better ways to play globalization is investment banking," Yardeni said. "Competitive pressures are forcing companies to constantly merge, acquire and divest as they try to position themselves to compete globally.""
3/14 Bloomberg "U.S. 4th-Qtr Current Account Deficit Rises to Record" link "The U.S. current account deficit widened more than forecast to a record $224.9 billion in the fourth quarter, driven by a ballooning trade gap that is poised to worsen this year ... For all of 2005, the deficit reached $804.9 billion, the biggest ever. The burgeoning gap threatens to undermine the dollar and foster higher interest rates should foreign investors tire of buying U.S. stocks and bonds, economists said. Rising interest rates and healthier economies abroad raise the possibility that investment may flow to other countries. ``It's a little, ticking time bomb,'' ... The U.S. needs to attract about $2.5 billion a day to fund the gap and keep the value of the dollar steady ... [the deficit] equaled 7 percent of the nation's gross domestic product in the fourth quarter and 6.5 percent of GDP for all 2005, both all-time highs. The deficit set a record in seven of the last eight years."
3/14 AFP "US current account deficit hits new high in 2005" link "Kathy Lien, chief fundamental analyst at Forex Capital Markets, said the data confirmed "clear structural deficiencies" that could undermine the US currency."
FHPN mini-essay: The juxtaposition of Goldman Sachs reporting record-breaking profits on the same day that the U.S. Commerce Dept. reported record-breaking current account deficits is a good indication of who benefits from the current global speculative finance system. And note well that Goldman's profit is after paying out huge compensation for its employees far, far in excess of what the average American can imagine.
This is the end-result of a critical choice made by the financial markets in the 1980s. At that time, the issue was how to compete against manufacturing trade competition from Japan, Germany, etc.
Eventually, corporate America, strongly influenced, via the CEO option linkage, by the short-term preferences of its speculative capital markets, chose to outsource, and U.S. economic policy emphasized seeking free global capital markets for its financial giants being fed liquidity steroids by Greenspan's Fed and later also the Bank of Japan (via "carry trades").
The corporate and policy shifts away from manufacturing competitiveness to an emphasis on unfettered globalized speculative finance enabled the U.S., with its highly vaunted advantages in flexibility (i.e. ability to implement wholesale layoffs without consequences), to "wrong-foot" the manufacturing-oriented, more socially consensual Japanese and German economies, which also were hurt by the bursting of a huge bubble in the former and the enormous costs of the re-unification with East Germany in the latter.
This gave a large comparative advantage to U.S. "free market" financial capitalism, which it then took full advantage in creating too huge booms, the first of which, based on the Internet, eventually crashed and burned.
After the collapse of the TMT equity bubble in 2000-02, this situation may have started to become more politically difficult. But Greenspan managed to keep the economy reflated barely skipping a beat with his negative real interest rate policy supporting a global real estate/consumer spending boom (aided by Bank of Japan's zero interest rate "quantitative easing"), while public attention was re-focused from corporate "bad apples" to foreign enemies in a permanent war setting.
The problem with this "solution" is that it has just put the U.S. deeper in debt, while lowering its standing abroad, and, importantly, greatly distracting it from focusing on the real solutions to its real problems.
The end-result was reported Tuesday, Goldman Sachs and key financial players making huge profits at the same that the U.S. sinks further into debt to foreigners, along with worker average real earnings that have been stagnant the past five years and are down 17% since 1972 (Table B-47, pg 338, "2006 Economic Report of the President, link).
This situation continues to increase political pressure on China to redress the effects of fateful U.S. mis-allocation of its resources away from advanced high-tech manufacting into speculative finance, enormously benefitting the very few in the financial elite, with Wal-Mart temp jobs with no benefits for the rest.