January 08, 2004

I.M.F. Says Rise in U.S. Debts Is Threat to World's Economy

What was the _resident's lamb-brain rationale? Oh,
yes, "It's your money!" Indeed.

New York Times: The report warns that the United
States' net financial obligations to the rest of the
world could be equal to 40 percent of its total
economy within a few years "an unprecedented level
of external debt for a large industrial country,"
according to the fund, that could play havoc with the
value of the dollar and international exchange rates.

Restore Fiscal Responsibility to the White House, Show Up for Democracy
in 2004: Defeat Bush (again!)

http://www.commondreams.org/headlines04/0108-02.htm

Published on Thursday, January 8, 2004 by the New York
Times
I.M.F. Says Rise in U.S. Debts Is Threat to World's Economy
by Elizabeth Becker and Edmund L Andrews

WASHINGTON, Jan. 7 With its rising budget deficit
and ballooning trade imbalance, the United States is
running up a foreign debt of such record-breaking
proportions that it threatens the financial stability
of the global economy, according to a report released
Wednesday by the International Monetary Fund.

Prepared by a team of I.M.F. economists, the report
sounded a loud alarm about the shaky fiscal foundation
of the United States, questioning the wisdom of the
Bush administration's tax cuts and warning that large
budget deficits pose "significant risks" not just for
the United States but for the rest of the world.

The report warns that the United States' net financial
obligations to the rest of the world could be equal to
40 percent of its total economy within a few years
"an unprecedented level of external debt for a large
industrial country," according to the fund, that could
play havoc with the value of the dollar and
international exchange rates.

The danger, according to the report, is that the
United States' voracious appetite for borrowing could
push up global interest rates and thus slow global
investment and economic growth.

"Higher borrowing costs abroad would mean that the
adverse effects of U.S. fiscal deficits would spill
over into global investment and output," the report
said.

White House officials dismissed the report as
alarmist, saying that President Bush has already vowed
to reduce the budget deficit by half over the next
five years. The deficit reached $374 billion last
year, a record in dollar terms but not as a share of
the total economy, and it is expected to exceed $400
billion this year.

But many international economists said they were
pleased that the report raised the issue.

"The I.M.F. is right," said C. Fred Bergsten, director
of the Institute for International Economics in
Washington. "If those twin deficits of the federal
budget and the trade deficit continue to grow you
are increasing the risk of a day of reckoning when
things can get pretty nasty."

Administration officials have made it clear they are
not alarmed about the United States' burgeoning
external debt or the declining value of the dollar,
which has lost more than one-quarter of its value
against the euro in the last 18 months and which hit
new lows earlier this week.

"Without those tax cuts I do not believe the downturn
would have been one of the shortest and shallowest in
U.S. history," said John B. Taylor, under secretary of
the Treasury for international affairs.

Though the International Monetary Fund has criticized
the United States on its budget and trade deficits
repeatedly in the last few years, this report was
unusually lengthy and pointed. And the I.M.F. went to
lengths to publicize the report and seemed intent on
getting American attention.

"I think it's encouraging that these are issues that
are now at play in the presidential campaign that's
just now getting under way," said Charles Collyns,
deputy director of the I.M.F.'s Western Hemisphere
department. "We're trying to contribute to persuade
the climate of public opinion that this is an
important issue that has to be dealt with, and
political capital will need to be expended."

The I.M.F. has often been accused of being an adjunct
of the United States, its largest shareholder.

But in the report, fund economists warned that the
long-term fiscal outlook was far grimmer, predicting
that underfunding for Social Security and Medicare
will lead to shortages as high as $47 trillion over
the next 70 years or nearly 500 percent of the current
gross domestic product in the coming decades.

Some outside economists remain sanguine, noting that
the United States is hardly the only country to run
big budget deficits and that the nation's underlying
economic conditions continue to be robust.

"Is the U.S. fiscal position unique? Probably not,"
said Kermit L. Schoenholtz, chief economist at
Citigroup Global Markets. Japan's budget deficit is
much higher than that of the United States, Mr.
Schoenholtz said, and those of Germany and France are
climbing rapidly.

In a paper presented last weekend, Robert E. Rubin,
the former secretary of the Treasury, said that the
federal budget was "on an unsustainable path" and that
the "scale of the nation's projected budgetary
imbalance is now so large that the risk of severe
adverse consequences must be taken very seriously,
although it is impossible to predict when such
consequences may occur."

Other economists said they were afraid that this was a
replay of the 1980's when the United States went from
the world's largest creditor nation to its biggest
debtor nation following tax cuts and a large military
build-up under President Ronald Reagan.

John Vail, senior strategist for Mizuho Securities
USA, said the I.M.F. report reflected the concerns of
many foreign investors.

"I would say they reflect the majority of
international opinion about the United States," he
said. And he added, "The currency doesn't have the
safe-haven status that it has had in recent years."

Many economists predict that the dollar will continue
to decline for some time, and that the declining
dollar will help lift American industry by making
American products cheaper in countries with
strengthening currencies.

"In the short term, it is probably helping the United
States," said Robert D. Hormats, vice chairman of
Goldman Sachs International.

Fund officials and most economists agreed that the
short-term impact of deficit spending has helped pull
the economy through a succession of crisis. And unlike
Argentina and other developing nations that suffered
through debt crises, the United States remains a
magnet for foreign investment.

Treasury Secretary John W. Snow did not address the
fund's report directly. But in a speech to the United
States Chamber of Commerce on Wednesday, he said Mr.
Bush's tax cuts were central to spurring growth and
reiterated the administration's pledge to reduce the
deficit in half within five years.

"The deficit's important," Mr. Snow said. "It's going
to be addressed. We're going to cut it in half. You're
going to see the administration committed to it. But
we need that growth in the economy. We had an
obligation to the American work force and the American
businesses to get the economy on a stronger path.
We've done it and we have time to deal with the
deficit."

But the report said that even if the administration
succeeded it would not be enough to address the
long-term problems posed by retiring baby boomers.

Moreover, the fund economists said that the
administration's tax cuts could eventually lower
United States productivity and the budget deficits
could raise interest rates by as much as one
percentage point in the industrialized world.

"An abrupt weakening of investor sentiments vis--vis
the dollar could possibly lead to adverse consequences
both domestically and abroad," the report said.

Copyright 2004 The New York Times Company

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Posted by richard at January 8, 2004 02:28 PM