Does anyone recognize what deep doo doo we are in. Gas at $ 55.00 a barrel. The stock market plummeting. The safe zone in Iraq invaded by a terrorist bomber... The middle class will not be able to afford the energy prices this Winter...and the gas prices at the pump hurt the middle class more too. AND THEN THIS:Federal Reserve Member McTeer Says U.S. Trade Imbalance May Cause the U.S. Dollar to Fall Rapidly
bloomberg.com
Oct. 7 (Bloomberg) -- The record U.S. current account deficit will lead to an inevitable decline in the value of the dollar, a drop that might be rapid and provoke a financial crisis, Dallas Federal Reserve Bank President Robert McTeer said.
In a New York speech, McTeer said a precipitous drop in the U.S. currency would lead to a big jump in interest rates. He offered no easy policy solution, saying he `` feels foolish warning about it'' because ``nothing bad has happened so far.''
The current account deficit, which reached $166.2 billion in the second quarter, ``is going to cause problems, but we just don't know when,'' McTeer said at a New York event hosted by Market News International.
At some point, foreigners will slow their investments in the U.S., meaning capital ``flows will turn against us, and there will be crisis that will result in rapidly rising interest rates and a rapidly depreciating dollar that will be very disruptive,'' he said. ``But I don't know what to do about it.''
The current account is the widest measure of trade in goods, services and financial transfers. Because the U.S. is consuming more foreign goods than it is paying for through export sales, it must import foreign savings to finance the purchases, typically through financial markets, such as foreign purchases of U.S. Treasury notes.
Fed View
From April through June the current account deficit was equal to about 5.7 percent of the nation's output. Other Fed officials have been more sanguine about the ability of the U.S. economy to handle the deficit.
Fed Vice Chairman Roger Ferguson said today that while the deficit ``cannot be sustained indefinitely,'' a correction will most likely occur through adjustments to saving, investment and asset prices, and those can occur without a crisis.
In March, Fed Chairman Alan Greenspan said that ``the odds are favorable that current account imbalances will be defused with little disruption'' so long as global financial flows aren't interrupted by restrictions or protectionism, a warning he has repeated several times.
The dollar trimmed a weekly gain against the euro and the yen in Asia after McTeer's comments. Against the euro, the dollar was at $1.2304 at 8:40 a.m. in Tokyo, from $1.2287 late yesterday in New York. It also was at 111.13 yen, from 111.24 yen.
Policy Options
One way to narrow the imbalance would be for U.S. growth to slow below its trading partners, which would lead to higher unemployment and lower living standards. The U.S. economy expanded by 4.8 percent from the second quarter of 2003 to the second quarter of this year, while the 12 euro-zone countries expanded by 2 percent during that time period, and Japan grew by 1.4 percent.
``The other alternative is a depreciating dollar,'' McTeer said. While he ``can't talk about'' that because currency policy is handled by the Treasury Department, ``over time I think there's only one direction'' for the dollar, he said.
Because the value of the dollar currently means imported goods are generally cheaper that similar goods made in the U.S., ``we're living higher on the hog than we could otherwise,'' McTeer said.
Interest Rate Forecast
Even with a high level of imports, McTeer said the U.S. economy probably grew at a 4 percent pace in the third quarter.
Strong growth has prompted the U.S. central bank to raise its overnight bank lending rate three times this year to 1.75 percent, from a 46-year low of 1 percent last June.
While trading in fed funds futures shows investors expect another quarter-percentage point increase at the Fed's Nov. 10 meeting, ``I don't think the next one will be automatic,'' McTeer said. ``I think it will be the result of what's going on in the economy.''
Accelerating inflation earlier this year has proven to be ``transitory,'' he said. The consumer price index outside of energy and food rose 1.7 percent in the year ended in September, slower than the 1.9 percent increase in June.
Still, the U.S. central bank needs to move the benchmark for U.S. borrowing costs to a level that neither halts growth nor stimulates inflation.
``We need to move back toward neutral,'' McTeer said, without defining what that rate might be.
``I don't think we have to go up a quarter point or a half point every meeting, just because we're still under neutral,'' McTeer said. Policy makers should meet and discuss and not ``put it on automatic pilot and say we are going to do a quarter point no matter what.''
Central bankers have been turning their attention more toward large-scale imbalances, such as the current account and the fiscal deficit in recent speeches. |
