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

"In nearly 60 pages of carefully worded analysis, the [IMF] report sounded a loud alarm about the shaky fiscal foundation of the United States ... 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"
I.M.F. Report Says U.S. Deficits Threaten World Economy
By Elizabeth Becker and Edmund L. Andrews
The New York Times

Wednesday 07 January 2004

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.

homepage: homepage: http://truthout.org/docs_04/010904I.shtml

... 09.Jan.2004 15:21

this thing here

dear mr. schoenholtz and mr. hormats,

what would happen to your jobs and your careers if you ran citigroup global markets and goldman sachs international into multi-billion dollar deficits and losses for the 2004 fiscal year? would the board just say, "oh heck kerm and bob, it's o.k. there's an upside to everything..."

if deficits are o.k., why don't your buddies in the white house keep balloning it to $700,000,000,000 by 2005? and then march onward, to a $1,000,000,000,000 deficit by 2006 or 2007? hell, if you like the cheap dollar now, why not drive it down even farther with an even bigger deficit? i get what you big wig financial guys are saying...

hell, why not have even more people lose their jobs, just so that the phillips curve doesn't happen. more unemployed, less inflation. how about it mr. schoenholtz and mr. hormats?

hell, why not completely eliminate social security and medicare? that would make the government more efficient right? plus, there would be hundreds of thousands of homeless, sick and dead seniors begging and lying all over the streets. no problem, just invest in the crematory and burial industry. i get what you big wig financial guys are all about. anything is o.k. if it makes money...


as for the IMF, they finally criticized the u.s. like they've done all the other countries. of course, they won't do anything about it. it makes me wonder... if america was some poor country somewhere, what would the IMF order us to do if we wanted their development loans? eliminate all public spending and instigate immediate fiscal austerity? privitize all public services?......

Good old IMF 09.Jan.2004 15:43

*

The total disconnect between how the IMF treats struggling third-world countries and how it treats the US is really quite interesting, although I must say it seems like if even the IMF is criticizing the US for a change, then things must be pretty fucked up. Other opinions? Are we really heading for another depression that will take the entire world with it?

AUSTERITY 09.Jan.2004 17:13

DUDE

Austerity is the plan for the future.

As I recall the IMF required a cut in social programs for nations that can't meet their debt.

Comments on Nations as Russia, Argentina, S. Korea, Brazil, Mexico are found... http://www.worldpolicy.org/journal/wucker.html

Its unclear if the US can declaree its debts null and void to the debt holders. Likely it could get away withit.
But that would eliminate many many retirements and insurance companies.
Quite a depression would be had.

smoke, mirrors, and a gamble for the election 10.Jan.2004 03:08

emmanuel goldstein

the powers that be hope to create the illusion of growth for the election. by plunging the value of the dollar relative to other world currencies, "they" hope to create the illusion of growth. US assets have become much cheaper - almost 50% in the last 2 years - for many foreign investors. "they" hope that this will lead to a huge influx of new money to support our borrowing. perhaps. but only if the influx outweighs the assets removed from the US economy by those who have just had 50% of their investments vanish.

it's a gamble, they'd call it a calculated risk. personally, i think they underestimate the hostilities their war crimes are breeding in the world. no country would take on the US militarily, except as a last option. however, the US is very vulnerable economically. china alone holds almost 20% of the outstanding US Treasury bonds. if they stopped buying, or worse - started selling, the US would be bankrupt overnight. almost all US debt is held by foreign entities. even the mortgages of our homes are packaged as bonds for the sale on foreign markets. Treasury Secretary O'Neil was recently fired for allowing the release of a report which showed the current total projected debt of the US was $44 TRILLION, while only 4 years ago there was a projected surplus of $11 TRILLION. currently, the US requires over $1billion a day in loans to keep the economy going.

but there's another major weakness. due to the US's imperial status, many world markets are traded exclusively in dollars. take the oil market. for a nation to buy oil, it must do so in dollars. this has been a primary factor behind the switch from gold to dollars as the reserve currency of the world over the last 30 years. dollars are the currency of the realm supported by US military might around the world. that means there are hundreds of TRILLIONS of dollars sitting in the central banks of the world. if the oil sellers - OPEC and Russia - decide to offer oil in euros, the demand for dollars will quickly decrease and they will return to the US as inflation. the combined power of the central banks of a few powerful countries could easily bring the US to its financial knees.

but "they" are willing to bet that they can overcome these risks and improve the economy based on plunder. but i am betting against them. i think the people of the world see through the illusion, even if the people of the US are blinded by media glamour.

this return to the tactics of empire will cause a short term gain, yes. but the costs will be horrific, spread across the generations of the peoples of many nations - magnified by the destructive power of modern science. one has only to look at history over the last 150 years to see where this will take us as a nation. yet, the very incompetence of the US government in Iraq shows that there is yet hope. perhaps even our soldiers will see how they are being cheated out of their benefits when they come home? they could be powerful allies in any movement for change.

however, the liquidation of the US middle class is being kicked into overdrive with the 1-2 punch of outsourcing high tech labor and allowing illegal workers to work in the US legally for sub standard wages. combined with the corporate crime wave - eg Enron's looting first of the people of California, and then of its own investors - the stage is being set for a massive transfer of wealth from the middle class to the ultra rich. the US recently decided to provide risk insurance to any US company that invests in Iraq. the result is that our tax dollars guarantee "they" will make a profit, one way or the other.

will "they" willingly give up this gravy train which is proving wildly more profitable than the system of consumer driven economics? that is the question of the hour. for now, they are content with creating the illusion of growth. they will try to win the "election" to provide their further plans legitimacy. will the American people, and the enforcers of our laws, go on believing we are the good guys when "they" open the Civilian Inmate Labor Facilities? i'm hoping that there are a few good men and women out there in public service who are doing their work for the right reasons. we will need their help if we are to stave of the vampiric oligarchy which has usurped our Constitution and is stealing our great nation out from under us.