Asia The Weekly Toyo-Keizai – October 19, 1996

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October 19, 1996


Listening to Mr. Armstrong, chairman of Princeton Economic Institute

Capital Flows into the US with the Background of “Uncertainties”

In the Presidential election, President Clinton will keep his advantage. But, even if Clinton wins, serious problems come to the surface next year.

After the election, interest rates will go up, Medi-Care will fall into deficit and time will be up for a reform of the social security system.

What is unfortunate is that no one, including politicians, wants to speak up the truth with more than 90% of the US journalists being biased to support Clinton.

The biggest failure Clinton made is shifting the national debt funding to the extreme short-term. Before Clinton, funding for one year or less accounted for 42% at the most but now does 70%. This has caused the level of the short-term interest rates to double and the interest expenditure burden has risen to account for 17% of the Government expenditures.

Also, tax burden for an average family was 25% of the income in the 1960s but is now 42% and a married couple is forced to be a two income family. It is said that inflation does not exist but CPI does not contain taxes. In the town of the state of New Jersey where I live, the fixed property tax was raised by 18% only in the last year, but costs like this do not appear in the inflation statistics.

Both Clinton and Dole advocate an income tax reduction and a balanced budget but Wall Street does not place trust in them. Only one prescription is to increase a number of tax payers by introducing a consumption tax. The introduction of a uniform 10% consumption tax bring 50% increase in the annual tax revenue and makes it possible to abolish income taxes and inheritance taxes and to guard against the bureaucracy and a big government.

Clinton is only in ecstasy of an illusion for his success. It will be certain that the financial deficit will again start for a sharp expansion as from the next year.

But ironically, the US’s rate of the interest expenditure burden against the government expenditure is the lowest among those of the major countries. Europe, Canada and Japan are rather in a more serious situation. Also, capital becomes very nervous and the volatility in the FX market gets further fierce under political uncertainties centering on Russia, the Middle East, North Korea and China./P>

I expect the US Dollar to rally up to 145 against Yen within two years to come with increasing uncertainties globally for the background. This might be a conservative view on the assumption of sudden incidents in Russia or so. Capital moves recklessly influenced by mental factors. In time of emergency in Russia, Yen could reach a historical high against the European currencies like D. Mark on the contrary. Anxiety about the European currency unification exists as well.

Also in the New York stock market, we expect a bubble typed development to form where the Dow Average will approach the 10,000 mark at the maximum going into 1998 after testing supports into early 1997 due to financial and interest rate factors.

If the market will move higher straightly, on the contrary, into next January, it will turn to a declining market at a point just before the 7,000 mark.

The US economy is very strong for the short-term and we will not see much slowing down until 1998. FRB will be forced to raise interest rates. Meantime, due to the observation that IMF who is on the verge of financial crisis will release its gold reserves, gold for the short-term will continue to be traded in a relatively depressed move considering uncertainties surrounding. For the longer term, however, it will turn to a bullish market going into 2003.