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Politics : World Affairs Discussion -- Ignore unavailable to you. Want to Upgrade?

To: lorne who wrote (3203)	1/8/2004 10:18:39 PM
From: ChinuSFO	Respond to of 3959

US watch out. Here comes the doom. US threat to world economy By Roy Eccleston, Washington correspondent and Geoffrey Newman 09jan04 Massive trade and budget deficits in the US threaten the world economy with higher interest rates, slower economic growth and a "disorderly" sell-off of the greenback, the International Monetary Fund has warned. In a grim message to Washington, the IMF argued there was a "substantial" risk the twin trade and budget deficits could see a messy plunge in the value of the US dollar, which has fallen sharply over the past year. As well, continuing deficits would eventually force "significant" interest rate hikes in the US and abroad, sucking money away from private investors, with the result being lower global productivity and income growth. Economists in Australia yesterday agreed there was a risk of a shock fall in the US dollar triggered by the twin deficits. But the risk was small and Australia, with its strong economy, stood a better chance than most countries of escaping the vortex caused by a savage fall in the US dollar. JP Morgan chief economist Andrew Pease said that unlike the US, Europe and Japan, Australia had more room to lower interest rates and boost government spending to blunt the global downturn. The IMF report, issued yesterday, painted a gloomy picture of US public finances, which it said had ballooned under George W. Bush mostly because of a recession and terrorism, but also because of unrestrained spending and a series of massive tax cuts. The IMF called on the US to urgently cut back spending and issued an unpalatable election year call on Mr Bush and the Republican Congress to increase taxes, especially on energy -- and to allow the series of recent personal tax cuts to expire between 2008-2010. The report is likely to give Democrats ammunition in their attacks on Mr Bush, although polls show the public increasingly approves of the President's handling of the economy. The IMF, representing 184 countries, is charged with fostering world economic growth and stable exchange rates. IMF economist Charles Collyns said the US spending splurge had been a valuable short-term tool in pushing the US out of recession and back to growth that was fuelling the fledgling world economic recovery. But he said the budget deficit of about $US475 billion ($619 billion) would not just be a problem for Americans if they were not brought back to balance within the next five to 10 years. Combined with a trade deficit running at about $US400 billion, the IMF argued the US's net financial obligations to the rest of the world could be up to 40 per cent of its total economic output within a few years, "an unprecedented level of external debt for a large industrial country". Mr Collyns said all this presented a "substantial" risk of a plunge in the US dollar, which would also hit US and international sharemarkets. Europe and Japan were already having trouble managing their economies because of the extent of the shift in the value of their currencies to the dollar. "So if this were to occur in a dramatic and disorderly way it would clearly have negative consequences for the global economy," Mr Collyns said. The Australian dollar slipped slightly yesterday, ending in local trade at US76.77c as the greenback clawed back some ground. US Treasury Secretary John Snow has argued that the US deficit at 4 per cent of gross domestic product is manageable, but said this week that the US planned to shrink the deficit to about 2 per cent of GDP within five years. But the IMF said this was not enough and that the deficit needed to be completely eliminated, because the ageing of baby boomers was going to cause a massive blowout on two hugely expensive public programs - social security and Medicare. theaustralian.news.com.au