U.S. president Bush is playing dangerous economic games in the hope of winning himself another election, BMO Nesbitt Burns Inc. chief economist Sherry Cooper says.

“Seismic shifts in U.S. economic policy are having a dramatic effect on the rest of the world, Cooper says in a report Friday. “The Bush administration, coupled with the Federal Reserve, is playing a high-stakes game of poker to reboot the U.S. economy in time for the 2004 Presidential election.”

Cooper notes that public opinion of his economic record is not good, and more than two million jobs have been lost on his watch. He would be the first president since the Depression to preside over job losses.
To counter this, the Fed is threatening further rate cuts, and the U.S. Treasury has backed away from its strong dollar policy. “This ‘neutral’-dollar policy has led to a further dramatic decline in the currency, which inevitably reflates the U.S. economy while deflating the rest of the world.”

Cooper says that Germany and Japan will be hit hard by these moves, as will Canada. She says that domestic manufacturers and commodity producers with a relatively large Canadian cost base are the most vulnerable; including the forest products sector, oil and gas companies, metals and steel sectors, and manufacturers. The companies that may be helped are domestic service and distribution companies facing little or no foreign competition, such as media and broadcasters, merchandisers and professional sports teams.

Playing games in currency markets is dangerous, she warns. “These are momentum markets that are technically driven, and recent comments from Secretary Snow only fuel the further decline in the U.S. dollar. Rapid currency movements are often destabilizing (triggering the stock market crash of October 1987 and the collapse of Long-Term Capital Management in 1998).”

“This is a very risky game for the U.S., which depends on foreign capital to fund its huge and growing current account deficit. Foreigners now own just over 15% of U.S. stocks, 48% of corporate bonds, and 20% of U.S. Treasury and agency bonds,” Cooper points out. “Were foreigners to reconsider their exchange-rate exposure and sell en masse, U.S. stocks would tumble and interest rates would rise, reversing the stimulative effects of current policy.

“No one knows how far the currency realignment will go, but the safest bet is that we are only part of the way there, and businesses should quickly begin to cut costs and reassess. Productivity-enhancing moves are essential for companies competing in the U.S. market. The ‘losing’ companies in Canada will be confronted head on by the ‘winning’ manufacturers and commodity producers in the U.S.,” she concludes.