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	January 9, 2004

IMF REPORT SAYS US DEFICITS THREATEN WORLD ECONOMY The NYT reports: "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 by the 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." I told you so. Historically, this kind of fiscal mismanagement, and the commensurate warnings from the IMF if ignored (and the Bush administration has already said it will ignore them), trigger the following consequences: Collapse of the offending country's currency. This has already begun, and the only reason it hasn't been more precipitous is that so many countries are owed so much by the US, repayable in US dollars, that these other countries will do everything they can to mitigate the decline until they can be repaid. Inability of the offending country to borrow in domestic currency. Lenders, burned or threatened by the currency collapse, insist that future and replacement debt be denominated in a more stable, reliable currency. The obvious choice would be the Euro. When (not if) lenders insist on being repaid in Euros, they no longer have any reason to prop up the US dollar, which will then fall to a level commensurate with the near-bankrupt status of the US economy. Ballooning cost of borrowing for everyone. When a country tries to borrow more money than it can comfortably repay, the risk to the lender soars, and the interest rate jumps quickly to double digits. This flows through the domestic economy, since banks and investors aren't going to loan money to American companies and individuals at a lower rate than they can get loaning money to the US government. Mortgage and corporate and consumer loan interest rates therefore jump to double digits too. Foreclosures and bankruptcies soar. The domestic stock and bond markets crash. As bond yields soar to reflect higher cost of borrowing, bond prices fall to the floor. The cost of borrowing to American companies soars, wiping out margins. Profits disappear. Stock prices fall. And since P/E ratios reflect the opportunity cost of lower-risk debt investments, stock prices fall much faster than earnings. Layoffs soar. Savings and pensions are wiped out. Cutoff of credit by the IMF. The IMF under its charter is charged with regulating international borrowings to ensure stability of global financial markets. They did this to the UK during the Suez Crisis -- basically telling the UK that they could not borrow any more money abroad until the economic fundamentals improved to the point repayment was reasonably assured. They've done it to many African and Latin American countries since then, and few of the countries affected have yet recovered. With no ability to borrow abroad and domestic lenders tapped out, there is no alternative but to radically slash government spending. There is no money available for even basic programs. Tax cuts are history, and steep tax increases are imposed to get the money to pay back the crushing, now high-interest debt. Financing of foreign wars is out of the question. This is not an exaggeration. Ask anyone in a country that has faced it. And while no one in the world wants to see this happen in the US (because it will have a domino effect, pushing the whole world into a depression), the world cannot afford to allow any country to borrow wildly beyond its means. Bush is playing brinkmanship here, rolling the dice and hoping that the economy will somehow recover and achieve unprecedented and sustained record prosperity for at least a generation to repay his staggering debt, before global investors lose their nerve and stop lending to the US, and the IMF is left with no alternative but to step in. The Times reports: "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 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." This is the first warning from the IMF. It will be ignored, as it was in Argentina. The consequences, for all of us, will be devastating. You know who to thank. 12:30:19 PM  trackback []  comment []

© Copyright 2004 Dave Pollard. Last update: 19/02/2004; 3:00:05 PM.