With its rising budget deficit and ballooning trade imbalance, the United States is running up a foreign debt of such record-breaking size that it threatens the financial stability of the global economy, according to report released Wednesday by the International Monetary Fund.
Prepared by a team of IMF economists, the report sounded a loud alarm about the shaky fiscal foundation of the United States. It questions the wisdom of the Bush administration’s tax cuts and warns that large budget deficits pose “significant risks” not just for the U.S. but for the rest of the world.
The report warns that the United States’ net financial obligations 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,” which 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 slow investment and 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.
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White House officials dismissed the report as alarmist, saying that President Bush already has 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.
But many international economists said they were pleased that the IMF raised the issue.
“The IMF is right. If those twin deficits–of the federal budget and the trade deficit–continue to grow, you are increasing the risk of a day of reckoning when things can get pretty nasty,” said C. Fred Bergsten, director of the Institute for International Economics in Washington.
Administration officials have made clear they are not alarmed about the country’s burgeoning external debt or the declining value of the dollar, which has lost more than one-quarter of its value against the euro over in the past 18 months. “Without those tax cuts, I do not believe the downturn would have been one of the shortest and shallowest in U.S. history,” said John Taylor, undersecretary of the treasury for international affairs.
Though the IMF has criticized the United States on its budget and trade deficits repeatedly in the past few years, this report was unusually lengthy and pointed. And the IMF went to lengths to publicize the report and seemed intent on getting American attention.
“I think it’s encouraging that these are issues that are now at play in the presidential campaign that’s just now getting under way,” said Charles Collyns, deputy director of the IMF’s Western Hemisphere department.
In the report, IMF economists also warned that the long-term fiscal outlook is far grimmer, predicting that underfunding for Social Security and Medicare will lead to shortages as high as $47 trillion over the next 70 years or nearly 500 percent of the current gross domestic product.
Some outside economists remain sanguine.
“Is the U.S. fiscal position unique? Probably not,” said Kermit Schoenholtz, chief economist at Citigroup Global Markets. Japan’s budget deficit is much higher than that of the United States, Schoenholtz said, and those of Germany and France are climbing rapidly.
But in a paper presented last weekend, former Treasury Secretary Robert Rubin said the federal budget was “on an unsustainable path” and that the “scale of the nation’s projected budgetary imbalance is now so large that the risk of severe adverse consequences must be taken very seriously, although it is impossible to predict when such consequences may occur.”
Other economists said they were afraid this was a replay of the 1980s when the United States went from the world’s largest creditor nation to its biggest debtor nation after tax cuts and a military buildup under President Ronald Reagan.
John Vail, senior strategist for Mizuho Securities USA, said the IMF economists’ report reflects the concerns of many foreign investors.
“I would say they reflect the majority of international opinion about the United States,” he said. And he added, “The currency doesn’t have the safe-haven status that it has had in recent years.”