IMF Researchers: US Budget Gaps Endanger Global Economy (Euro trash has a cow)

Dow Jones Newswire via Yahoo! News ^ | 1/7/2004 | Joseph Rebello

[playball0]

IMF Researchers: US Budget Gaps Endanger Global Economy

By Joseph Rebello, Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)--Economists at the International Monetary Fund (news - web sites) on Wednesday expressed alarm at growing U.S. budget deficits, saying continued deficits could hurt the global economy by roiling currency markets and driving up interest rates.

In a report on U.S. budget outlook, IMF researchers described the state of government finances as "perilous" in the long run and urged Congress and the White House to take steps to quickly rein in the deficits. Although federal tax cuts and spending increases since 2001 bolstered the global economy in the short run, the report said "large U.S. fiscal deficits also pose significant risks for the rest of the world."

A key risk is that the recent slide of the U.S. dollar against other major currencies could become "disorderly," the researchers said. The dollar has declined sharply since early 2002 against both the European common currency and the Japanese yen, complicating the task of European and Japanese monetary policymakers, said Charles Collyns, who heads the IMF team that monitors the U.S. economy.

"We feel there is a substantial risk that the foreign investors' appetite for U.S. assets, and in particular U.S. government assets, will over time diminish," Collyns said in a news conference. "We think to some degree over the past year this has occurred, and this is one of the reasons why there has been weakness in the U.S. dollar." So far, he said, the decline hasn't jeopardized the economic recoveries in Europe and Japan, but the danger to the global economy could grow if the U.S. budget deficits aren't shrunk.

The White House has said it expects the budget deficit to expand to a record $ 475 billion in fiscal 2004, exceeding 4% of the gross domestic product. U.S. Treasury Secretary John Snow on Wednesday described that level as "entirely manageable," and said the Bush administration expects the deficit to shrink to 2% of GDP (news - web sites) within five years.

But the IMF researchers said that won't be enough to address the government's long-term fiscal problems - including financing the Social Security (news - web sites) and Medicare programs over the next 75 years. In their report, they said the government faces a $47 trillion shortfall in its ability to pay for those and all other long-term obligations. Closing that gap would require "an immediate and permanent" federal tax increase of 60% or a 50% cut in Social Security and Medicare benefits.

The dollar's recent decline, the researchers said, suggests that foreign investors are starting to worry about the U.S. government's ability to resolve its long-term fiscal problems. "The United States is on course to increase its net external liabilities to around 40% of GDP within the next few years - an unprecedented level of external debt for a large industrial country," they said in the report. "This trend is likely to continue to put pressure on the U.S. dollar."

The IMF report said the ratio of U.S. public debt to GDP is expected to increase by 15 percentage points over the next decade. If that occurred, global interest rates, adjusted for inflation, would rise by an average of 0.5 to 1 percentage point. "Higher borrowing costs abroad would mean that adverse effects of U.S. fiscal deficits would spill over into global investment and output," the report said.

Congress and the White House can avert those dangers by acting immediately to balance the budgets, the researchers estimated. Allowing the recent tax cuts to expire by 2013 would reduce the budget shortfall by nearly half. The researchers also said Congress should consider a tax on energy consumption, arguing that it would "help meet the administration's environmental objectives while also providing substantial support for fiscal consolidation." Such tax increases, they calculated, would have a minimal effect on U.S. economic growth.

-By Joseph Rebello, Dow Jones Newswires; 202-862-9279; joseph.rebello@dowjones.com

[optik_b]

"This should solve the trade deficit just fine."

Why would it solve the trade deficit when the countries we have the largest trade deficit with (China) is not affected by the dollars fast slide against the Euro. Americans' appetite for imports is growing at a record pace and the rush to outsource and manufacture products outside the USA in china and the far east is only accelerating.

[Fenris6]

"Statistically speaking the odds"

That makes no sense. How can you have stats on what is a surprise? I live in the DC area, work a block away from the Captiol, so I guess my sense of the threat is somewhat exagerated.

FWIW, my point was that when at war, you focus on survival and defeating the threat - you can always pay off the US debt later. A balanced budget means nothing to a country with cities in irradiated ruin.

[D Rider]

I was specifically sspeaking of our deficit with Europe. Western Europe was the context.

[theFIRMbss]

>IMF Researchers: US Budget Gaps Endanger Global Economy (Euro trash has a cow)

Why does anyone care what Tom Cruise says about the economy?!

[optik_b]

"That makes no sense."

Of course it makes no sense if you are acting purely on some emotional fear that you are not going to be "ALIVE when these bills come due." Start using logic. I work in downtown DC too, but I don't live in fear. It's like the foolish idiots who are afraid to travel on airplanes because they think they might die in a crash, but don't think twice about getting in their car and driving home when there are drunk drivers/people falling asleep/senile old people all over the roads.

"FWIW, my point was that when at war, you focus on survival and defeating the threat - you can always pay off the US debt later. A balanced budget means nothing to a country with cities in irradiated ruin."

You are correct that the primary purpose of the government is to defend the country. Part of doing that includes the long term economic capability to fund a defense. Massive budget spending and huge federal giveaways such as Prescription drugs, farm bills, etc are not goign to achieve that goal.

[ruppertdog]

You are correct. Poorly managed debt with undermine the creditworthyness of the whole country. The government tries to fix the currency and speculators will call the bluff and use the arbitrage situation to their advantage. Soros did this in Britain and made billions in one day.

Some see a lower dollar as a good thing because it restores competitive balance to domestic producers by making their goods and services more affordable overseas. It is a mixed bag. Personally, my biggest expense is energy costs. I think technological advances in this area and other areas will keep us competitive with a very high standard of living. Our innovative nature will keep us on top.

[HostileTerritory]

So, do you feel any less safe because that HOOTERS in Shreveport didn't get federal money?

[HostileTerritory]

Our merchandise trade with Europe is a relatively minor part of the international economy--and not at all a source of concern for the stability of the system.