IMF warns trade gap could bring down dollar
Charlotte Denny and Larry Elliott
The Guardian
The International Monetary
Fund yesterday warned that the colossal
United States trade deficit was a noose around the neck
of the economy, emphasising that the once mighty dollar
could collapse at any moment.
Arguing that the world's big
economies were already too dependent on
the willingness of American consumers to live beyond
their means, the IMF said the US could not continue to
run a current account deficit of 5% of GDP.
The IMF's chief economist
Kenneth Rogoff said that it was just a
matter of time before the gap closed, tipping the dollar
into a potentially steep fall.
"If we were looking at
a poor developing country, the world gives
them just enough rope to hang themselves. A country like
the United States, they give them enough rope to tie the noose around their
neck several times. But it does happen
in the end," he said.
In its twice yearly report
on the world economy, the Fund warns
that even a controlled slide in the dollar's value is likely
to slow US growth and unless other countries picked up
the slack, the global economy would suffer.
Mr Rogoff said the collapse
of world trade talks last weekend in
Cancun could spell disaster for a global economy already
too dependent on unbalanced growth in the US. Describing
the breakdown as a "tragedy", he said global poverty
would rise if protectionism took root in the world's
biggest economies.
Wars in Iraq and Afghanistan
and heightened geopolitical tensions
worldwide after the September 11 attacks on the US would
"unquestionably" hold back growth in the decades ahead,
Mr Rogoff told reporters.
The report was highly
critical of Europe's stagnating economies,
blaming governments for failing to embrace deep structural
reforms of their labour markets and welfare states.
"Reforms to improve the
competitiveness of European labour and
product markets could yield significant dividends in terms
of regional output," the report said.
It also warned that an
overrigid application of Europe's fiscal
rulebook could push the eurozone deeper into trouble.
Chancellor Gordon Brown
echoed the IMF's criticisms of the eurozone
in an article in yesterday's Wall Street Journal, arguing
that the credibility of Europe was at stake.
Demanding wide-ranging
change to policies "that have held back
our continent for too long", Mr Brown added: "Reform is
not just desirable, it is an urgent necessity."
The chancellor said:
"Having created a single market in theory,
we should make it work in reality - and help it spread
competition, cut prices, increase consumer choice and
deliver higher productivity."
The impact of the stalled
trade talks in Mexico on the fragile
global recovery will dominate this weekend's annual meeting
of the IMF and the World Bank in Dubai.
Mervyn King, the governor of
the Bank of England, said yesterday:
"The failure of the talks in Cancun will cast something
of a cloud over the meeting.
"That is not a happy
background in which to assess the durability
of the recovery."
Misalignments between the
world's biggest currencies are also
likely to feature on the agenda, with the US hoping other
countries will support its campaign to get China to strengthen
its currency, the yuan.
Following an upgrading of
its growth prospects by the fund, the US
is expected to expand by 2.6% this year, the fastest of
the big seven economies.
The Atlanta Journal-Constitution: 9/18/03
GAO grim on deficit outlook
By MARILYN GEEWAX
WASHINGTON -- The federal government's budget
is in far worse shape than most
Americans realize, and the fiscal hole
is deepening, the head of Congress' nonpartisan watchdog
agency said Wednesday. "Our projected budget deficits are not
manageable without significant
changes" in taxes or spending, U.S. Comptroller
General David Walker said in a speech to the
National Press Club. "We cannot
simply grow our way out of this problem."
Walker, who heads the
General Accounting Office, said he is a
nonpartisan auditor whose job is to "state the facts and speak
truth" about the nation's bookkeeping. Current accounting
systems fail to adequately reflect just how severe
the government's fiscal problems are, he said.
"The time has come for
all responsible parties to recognize reality,"
Walker said. "Our nation has a major long-term fiscal
challenge that is not going away."
Walker's assessment of the
budget deficit is far grimmer than the
Bush administration's. White House officials have stressed
the importance of cutting taxes while calling the deficit
a manageable and relatively minor problem.
Walker vigorously disagreed.
"The bottom line is,
there is little question that deficits do
matter, especially if they are large, structural and recurring
in nature," he said. "The days of surpluses are gone,
and our current and projected budget situation has worsened
significantly."
His comments came as the
Treasury Department on Wednesday reported
the deficit had reached $400.5 billion for the first
11 months of the 2003 budget year -- twice as much as for
the same period a year earlier.
Bush stance challenged
President Bush has blamed
the rise of deficits during his term on
the economic recession, the wars in Afghanistan and Iraq
and higher spending on domestic security -- not on the tax
reductions he championed.
Walker, a former Reagan administration official, said
Bush's explanations don't add up.
"It's true that
deficits are understandable and sometimes necessary
in times of recession and/or war," Walker said. "However,
while it may not seem like it to those who are out
of work or underemployed, we have not been in a recession
for almost two years."
Moreover, projected deficits
"far exceed the costs associated
with Iraq, the global war against terrorism and any
incremental homeland security costs," Walker said. "It is
time to admit we are in a fiscal hole and to stop digging."
Contacted after Walker's speech, White House spokeswoman
Claire Buchan, said Bush "believes that
returning the budget to balance is an
important priority." However, he must
focus right now on "economic security and waging the war
on terrorism," she said. "Those priorities are more important
at this point."
She said tax cuts were
needed because "it's important that we
make every effort to grow the economy, because a growing economy
will help reduce the budget deficit."
Stephen Moore, president of
the powerful tax-cut advocacy group Club
for Growth, said Congress' focus should be on reducing
spending. Economic growth will boost government revenues
and "tax cuts are an important part of getting the economy
going again," he said. At the same time, "we need to
do something about this stampeding growth in spending."
A daunting reversal
After four straight years of
budget surpluses through 2001, the
government returned to deficit spending in 2002. The Congressional
Budget Office said last month that the federal
deficit would hit $480 billion next year, far exceeding
the previous record of $290 billion in 1992.
The CBO also predicted
annual budget shortfalls would total nearly
$1.4 trillion over the next decade, a stunning reversal
from the 10-year, $5.6 trillion surplus it forecast
in 2001.
Walker said even those
daunting figures do not convey the scope
of the problem, because conventional government accounting
leaves out the impact of benefits promised to Americans
under veterans' health programs, Social Security, Medicare and others.
"These additional
amounts total tens of trillions of dollars,"
he said. "They are likely to exceed $100,000 in additional
burden for every man, woman and child in America today,
and these amounts are growing every day."
Walker said Congress must
make tough choices about both taxes and
spending.
On Capitol Hill and on the
campaign trail, Democrats have seized
upon the rising deficit to criticize Bush for his support
for massive tax cuts in 2001 and 2003.
Members of both major
political parties are expected to focus
on the deficit in the coming week as Congress considers
the president's request, made formally Wednesday, for
an additional $87 billion for military operations and rebuilding
in Iraq and Afghanistan.
Before becoming comptroller
general in 1998, Walker was a partner
and managing director in the Atlanta office of Arthur
Andersen LLP. The accounting firm unraveled in 2002 in
the wake of auditing scandals involving its clients Enron
Corp. and WorldCom.
Walker, in his speech, drew parallels between the federal government's
accounting problems and those that engulfed a number
of American companies in recent years.
"The recent
accountability failures in the private sector serve
to reinforce the importance of proper accounting and reporting
practices," he said. "It is critically important that
such failures not be allowed to occur in the public sector."
Walker was appointed
comptroller general by President Clinton
and approved by the Republican-controlled Senate.
During the Reagan
administration, he was an assistant secretary
of labor. He said currently he is neither a Democrat
nor a Republican.
The comptroller general
serves a 15-year term and enjoys an exceptional
degree of independence.
Thomas Mann, a senior fellow
at the Brookings Institution, a
left-leaning think tank, said it is "perfectly appropriate"
for the comptroller to speak out about the deficit.
"Every serious policy
person recognizes we now face very serious
medium- and long-term deficit problems."
The Associated Press contributed to this
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