News
Good news, bad news: Montana’s economy continues to chug along, the country’s growing national debt may crush our grandchildren – Economic `Armageddon’ predicted
In what will likely be his last address to Billings business leaders, Wells Fargo Chief Economic Officer and Executive Vice President Sung Won Sohn said the Montana economy has changed greatly since he first saw the state in 1975.
By JAN FALSTAD
Of The Gazette Staff
The Minneapolis-based economist was in Billings recently speaking to clients and business leaders, saying the state’s economy now is far less dependent on natural resource extraction and has recovered from the recession of the 1980s.
"I remembered very tough years. We lost a lot of ground," he said.
Sohn, born and raised in Seoul, South Korea, has a knack for explaining complex topics in simple English, a second language for him.
Three years ago, Bloomberg News named him one of the five most accurate economic forecasters in the United States. Two years ago, Blue Chip Publications called him the most accurate forecaster in the West.
He said Montana has three reasons to be optimistic about its economy: jobs are growing, housing remains relatively inexpensive and the state offers quality of life.
"I’ve always said western Montana is the Switzerland of the United States and people are starting to find out," he said.
In an easygoing talk sweeping across macroeconomics, microeconomics and Montana economics, Sohn laid out what’s going well and going wrong in Montana and the nation.
This was one of his last speeches as a Wells Fargo economist because he’s accepted a banking job in California.
Uncertainties linger for the national economy, Sohn said, "but I’m seeing light at the end of the tunnel."
Montana dreamin’
Since Montana’s 1980s recession, commodity prices have begun to recover and the state is adding more service and value-added jobs, Sohn said.
"Over the last dozen years or more, the state really has changed," he said. "It’s not as dependent on commodities."
Montana’s jobless rate of 4.3 percent (about 20,800 workers) sits lower than the United States rate of 5.5 percent for October, according to the latest figures by the state Department of Labor and Industry,
The population – still just below 1 million – is growing, but not as fast as the nation’s population. This is leading to a labor shortage, he said.
On the bright side, major companies that find it difficult to expand in states like California and Washington, where houses are so expensive workers can’t afford them, are choosing colder climates.
The mighty Microsoft has opened a technology center in North Dakota.
"They found Fargo a nice place and the productivity is very high," Sohn said. "People work very hard."
Deficits
Last week, a lame-duck Congress voted to increase the national debt ceiling by $800 billion, the third hike in this administration.
Total deficit spending is expected to $2.2 trillion by late next year.
That red ink, coupled with record trade deficits, means real costs, Sohn said.
"As Americans we borrow $1.8 billion every day. It will be $2 billion a day next year," he said. "Why? Because we spend too much."
That money goes to pay interest on our debt, largely to overseas investors.
The record-setting deficits under President Bush and the Republican-controlled Congress, which inherited a surplus, have long-term consequences.
The red ink means bills for our grandchildren and great-grandchildren, Sohn said.
According to federal figures, the annual deficit is at $471 billion and climbing largely because of the Iraq war. That means every taxpayer owes $28,000 plus interest and that may mean longer work days.
"I think Americans may be working 10 hours a day, four hours to pay dividends on this foreign debt and six hours to support their children and families," Sohn said.
Inflation and interest
Sohn said he never thought he’d live to see a federal funds target rate as low as 1 percent.
This is the interest rate banks charge each other for overnight loans. By setting this rate higher, the Fed tries to hold the lid on inflation.
Interest rates have climbed some from their 40-year lows.
They may continue to rise, Sohn said, adding that Federal Reserve Chairman Alan Greenspan retires in January 2006 and he’ll be reluctant to jack them up significantly.
"He’s concerned about this legacy," Sohn said. "Most of us believe he will raise rates gradually."
Jobs
While a lot of jobs were created nationally at the beginning of this year, Sohn said many well-paying manufacturing jobs have left and aren’t coming back. Especially hard hit are Illinois, Pennsylvania, Ohio and Indiana.
These jobs may be replaced, in part, by new technologies in fields like life sciences.
"American productivity increases because we destroy creatively," he said. "We recently destroyed typewriters and got computers."
Businesses are sitting on a lot of cash, he said, meaning they don’t have to borrow much money from banks. Instead of spending their cash, he said companies are focused on boosting productivity with smaller workforces.
"This is one reason today businesses don’t have to build buildings or hire people," he said. "They get more out of the people they have."
Net worth
The net worth of Americans has climbed significantly, Sohn said, in large part because of the equity of their homes.
In 1952, real estate made up 23 percent of a family’s assets. That jumped to 34 percent during the second quarter this year.
Income and consumption also is rising while oil prices are dropping.
Demand has increased too much from countries like China for oil to go back down to $10 to $20 per barrel, he said. However, high prices will spur conservation and exploration.
"I think oil will go from $50 a barrel to $42 or $43 next year," he said.
Privatizing Social Security
The question here is two-fold.
How will the country get the estimated $2 trillion to $3 trillion it will take to let people invest some of their own Social Security contributions?
And will the system be voluntary or mandatory?
"I know how to manage my money," Sohn said. "But if you aren’t confident in managing money, you shouldn’t have to."
Tax policy
Bush wants tax reform as do most Americans, Sohn said.
The question is what kind? Who wins and who loses and how does the country pay for this without pushing the deficit higher?
Closing loopholes sounds good, he said, "But are we going to give up interest deductions on our homes?"
A value-added sales tax that taxes spending, not income, is regressive: lower-income people pay a disproportionate share. And it’s too easy to raise, Sohn said.
"In Europe, the tax started at 2 percent to 3 percent," he said. "Now it’s at 27 percent."
Also, he said sales taxes traditionally have been revenue sources for states, which will fight any move by the federal government to tap this money.
While he personally favors for a flat tax, this tax also is regressive so that impact needs to be offset.
"We could give the lower income people a check or a credit," Sohn said. "I think that’s an attractive idea, but I doubt it will fly politically."
Terrorism
When asked how another terrorism attack on the United States would impact the economy, Sohn said that except for the sad loss of lives on 9/11, the country recovered very well.
"Our political and social system was very strong," he said. "We came out basically unscathed." Impacts of a future attack will depend on the severity and nature of the strike, he said.
Tourism
While mining and agriculture is being de-emphasized in Montana’s economy, tourism is being discovered by a wider audience.
The number of visitors and the dollars they spend has increased steadily over the past decade.
When Sohn used to fly here to go skiing, people would look puzzled when he said, "I’m going to Big Sky, Montana. They didn’t know where it was."
California-bound
After spending 30 years at Wells Fargo, formerly Norwest Banks, in Minneapolis, Sohn is switching careers.
The economist, who earned a Ph.D. at the University of Pittsburg and an MBA at Harvard Business School, decided to move his family from Minneapolis-suburb of Bloomington to Southern California.
He takes over Jan. 3 as chief executive officer and president of Hanmi Bank, a leading Korean-American bank.
He will work to build Hanmi into a leading bank serving immigrants of all nationalities.
Talk about housing sticker shock.
Southern California real estate is so inflated that Sohn said that spending in Los Angeles what he’s invested in his Minnesota home wouldn’t buy a good garage.
If his family were to replace their home in California, they’d need would need $3 million, he said. With a property tax of 1¼ percent, real estate taxes alone would cost $36,000 per year.
Sohn finished his talk on an upbeat note. "I am pretty optimistic about the economy," he said. "In 2004 and ’05, we need to be optimistic."
Sohn’s speech was sponsored by Wells Fargo, Montana State University-Billings and The Billings Gazette.
Jan Falstad can be contacted at (406) 657-1306 or at [email protected].
Copyright © The Billings Gazette, a division of Lee Enterprises.
***************
Economic `Armageddon’ predicted
By Brett Arends/ On State Street
http://business.bostonherald.com/businessNews/view.bg?articleid=55356
Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish.
But you should hear what he’s saying in private.
Roach met select groups of fund managers downtown last week, including a group at Fidelity.
His prediction: America has no better than a 10 percent chance of avoiding economic “armageddon.”
Press were not allowed into the meetings. But the Herald has obtained a copy of Roach’s presentation. A stunned source who was at one meeting said, “it struck me how extreme he was – much more, it seemed to me, than in public.”
Roach sees a 30 percent chance of a slump soon and a 60 percent chance that “we’ll muddle through for a while and delay the eventual armageddon.”
The chance we’ll get through OK: one in 10. Maybe.
In a nutshell, Roach’s argument is that America’s record trade deficit means the dollar will keep falling. To keep foreigners buying T-bills and prevent a resulting rise in inflation, Federal Reserve Chairman Alan Greenspan will be forced to raise interest rates further and faster than he wants.
The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded.
Less a case of “Armageddon,” maybe, than of a “Perfect Storm.”
Roach marshalled alarming facts to support his argument.
To finance its current account deficit with the rest of the world, he said, America has to import $2.6 billion in cash. Every working day.
That is an amazing 80 percent of the entire world’s net savings.
Sustainable? Hardly.
Meanwhile, he notes that household debt is at record levels.
Twenty years ago the total debt of U.S. households was equal to half the size of the economy.
Today the figure is 85 percent.
Nearly half of new mortgage borrowing is at flexible interest rates, leaving borrowers much more vulnerable to rate hikes.
Americans are already spending a record share of disposable income paying their interest bills. And interest rates haven’t even risen much yet.
You don’t have to ask a Wall Street economist to know this, of course. Watch people wielding their credit cards this Christmas.
Roach’s analysis isn’t entirely new. But recent events give it extra force.
The dollar is hitting fresh lows against currencies from the yen to the euro.
Its parachute failed to open over the weekend, when a meeting of the world’s top finance ministers produced no promise of concerted intervention.
It has farther to fall, especially against Asian currencies, analysts agree.
The Fed chairman was drawn to warn on the dollar, and interest rates, on Friday.
Roach could not be reached for comment yesterday. A source who heard the presentation concluded that a “spectacular wave of bankruptcies” is possible.
Smart people downtown agree with much of the analysis. It is undeniable that America is living in a “debt bubble” of record proportions.
But they argue there may be an alternative scenario to Roach’s. Greenspan might instead deliberately allow the dollar to slump and inflation to rise, whittling away at the value of today’s consumer debts in real terms.
Inflation of 7 percent a year halves “real” values in a decade.
It may be the only way out of the trap.
Higher interest rates, or higher inflation: Either way, the biggest losers will be long-term lenders at fixed interest rates.
You wouldn’t want to hold 30-year Treasuries, which today yield just 4.83 percent.
MATR Supporters (view all)
Sorry, we couldn't find any posts. Please try a different search.