Payment shock lies in wait,
reuters.com
Deficit's growth looms as threat
thesunlink.com
By James Toedtman, Newsday
November 3, 2004
WASHINGTON — That $2.15-a-gallon sticker shock for gas could be just the beginning.
Beneath the political radar scope, soaring energy prices have triggered a burgeoning deficit that preoccupies global policy-makers, is growing to historic proportions and threatens an aftershock that includes higher interest rates, an economic slowdown and inflation.
Called the current account deficit, it is the combination of the nation's trade deficit and the total investments in U.S. stocks and bonds owned by foreign individuals, businesses, and governments. At nearly $600 billion, it represents over 5 percent of the nation's gross domestic product, the highest ever and a 50 percent increase since 2001.
"The problem is that sooner or later, we'll have to face the music," said economist Sung won Sohn, executive president of Wells Fargo bank.
The factors driving up the deficit today are the soaring cost of oil and the value of the dollar. Oil prices have nearly doubled in the past two years, have driven gasoline prices to record highs, drained household budgets and stifled business activity.
The dollar, meanwhile, which had lost 20 percent of its value in 2001 and 2003, has stabilized this year. That hurts U.S. manufacturers trying to sell their products overseas because because a stronger dollar makes their goods more expensive. At the same time, the stronger dollar kept the cost of imported goods, especially clothing, cars and appliances, low and popular for America consumers.
On top of that, consumers' purchases of higher priced gasoline and home heating oil sends as much as $575 million a day into the bank accounts of OPEC nations, further widening the deficit.
U.S. economists have been wrestling with the conflicting forces, with some concluding that the United States economy can withstand the current account balance's unprecedented growth.
But most agree that a tipping point is not far off.
That will come when foreign investment in the United States slackens, and is diverted instead to stronger currencies like the euro, whose value relative to the dollar has risen 40 percent.
The risk is a sudden shift in investor preference. "A more mature China central bank could decide to diversify," said Mark Zandi, chief economist for Economy.com. "Hopefully, they would discover the stock market." Until now, China and Japanese central banks have been loyal and significant foreign investors in U.S. government securities. Their continued willingness to buy Treasury notes and bonds has helped keep interest rates down despite the ongoing federal budget deficits — now $415 billion.
But economists fret that past loyalties could change.
Under that scenario, a sell-off of U.S. securities could trigger a sharp decline in the value of the dollar, which in turn would lead to inflation because imported goods became more expensive. It would also drive up interest rates at a time of record household debt in the United States.
With a banker's understatement, Robert McTeer, president of the Dallas Federal Reserve Bank, warned of the consequences. "There will be a crisis that will result in rapidly rising interest rates and a rapidly depreciating dollar that will be very disruptive," he said.
Some worry that the euro could even threaten the traditional role of the dollars the world's reserve currency.
Addressing the imbalance is complicated, requiring help from China, which has kept its currency exchange rate artificially low, and a balanced budget effort by the new president, said Sohn. Faced with a similar problem, Ronald Reagan decided to raise taxes after his 1984 reelection. From 1985 to 1988, the value of the dollar fell 50 percent against other main currencies. Inflation and bond yields rose and in October 1987, the stock market collapsed.
"This is a delicate issue," said Lou Crandall, chief economist for Wrightson ICAP, a Wall Street research firm. "Nobody wants to leave their fingerprints on a currency collapse. However the potential for an ugly outcome is growing as the current account deficit soars."
Distributed by the Los Angeles Times-Washington Post News Service |
