Deficit Threatens the Globe

I.M.F. Report Says U.S. Deficits Threaten World Economy
By ELIZABETH BECKER and EDMUND L. ANDREWS

Published: January 7, 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.