I.M.F. Report Says U.S. Deficits Threaten World Economy

[Dave Farber <dave () farber net>]

I.M.F. Report Says U.S. Deficits Threaten World Economy

January 7, 2004
 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 made public today bythe International
Monetary Fund.

In nearly 60 pages of carefully worded analysis, 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 posed "significant risks" not just for the United
States but for the rest of the world.

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

The dangers, according to the report, are that the United
States' voracious appetite for borrowing could push up
global interest rates and thus slow down 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 President Bush had 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.

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

Though the International Monetary Fund has repeatedly
criticized the United States on its budget and trade
deficits in the last few years, this report was unusually
lengthy and pointed.

Fund officials said the new report reflected the views of
the authors and not the institution as a whole, whose
largest shareholder is in fact the United States. But fund
officials also seemed intent on getting American attention.


"It's encouraging that these are issues at play in the
presidential campaign now under way," said Charles Collins,
deputy director of the I.M.F.'s Western Hemisphere
Department and a principle author of the report. "We're
trying to contribute to persuading public opinion that this
is an important issue that has to be dealt with."

Fund officials warned that the long-term fiscal outlook was
far grimmer, predicting that underfinancing of Social
Security and Medicare would lead to shortages as high as
$47 trillion over the next several decades, or nearly 500
percent of the current gross domestic product in the coming
decades.

Many 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," Kermit
L. Schoenholtz, chief economist at Citigroup Global
Markets, said. 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.

The dollar has lost nearly one-fifth of its value against
the euro in the past 18 months, and the dollar hit new lows
against the euro this week.

Many economists predict that the dollar will continue to
decline for some time, and that the declining dollar will
help boost 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 Hormats, vice chairman of Goldman Sachs
International.

http://www.nytimes.com/2004/01/07/politics/07CND-FUND.html?ex=1074522583&ei=1&en=1641a97797d02665


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