Money Worries

The International Monetary Fund doesn’t like the look of the U.S. budget deficit.

Add the International Monetary Fund to the ranks of Democratic presidential hopefuls and conservative Republicans sounding the alarm over the Bush administration’s massive budget deficit. The I.M.F. is often criticized as being a creature of Washington, but there was nothing to cheer President Bush in a Fund report this week calling the deepening U.S. deficit a threat to the world economy.

Specifically, the report finds that the growing U.S. deficit could discourage private investment and weaken confidence in the dollar, and it blames the administration’s tax cuts and heavy spending.

“This trend (of deficits) is likely to continue to put pressure on the U.S. dollar, particularly because the current account deficit increasingly reflects low saving rather than high investment…Although the dollar’s adjustment could occur gradually over an extended period, the possible global risks of a disorderly exchange rate adjustment, especially to financial markets, cannot be ignored.”

The report explains that external debt could rise to unprecedented levels for an industrial country as large as the U.S. This could lead to a situation where the low value of the dollar could undermine the value of international exchange rates. In the past year, the dollar has lost almost 22 percent to the euro, and 12 percent to the Japanese yen.

White House officials pooh-poohed the report, saying the administration has the situation under control. Wednesday, U.S. Treasury Secretary John Snow, told the press that the deficit was manageable.

“Our fiscal situation remains a matter of concern … we still face a deficit in the 500 billion range for the current fiscal year, larger than anyone wants. … But that size deficit … is entirely manageable.”

But the I.M.F. isn’t exactly out there in its prognosis. As the Economist reports a recent paper given at the American Economic Association, raised serious questions about the deficit.

“Peter Orszag of the Brookings Institution, Allen Sinai of Decision Economics and Robert Rubin, one of Bill Clinton’s treasury secretaries, say that ‘substantial deficits projected far into the future can cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad’—in other words, a full-blown, third-world-style financial crisis.”

In an election year, such reports have political consequences, as Charles Collyns of the I.M.F.’s Western Hemisphere department, acknowledges.

“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…. We’re trying to contribute to persuade the climate of public opinion that this is an important issue that has to be dealt with, and political capital will need to be expended.”

But it’s doubtful that the deficit will become a top campaign issue this year, Howard Wolfson, a Democratic campaign strategist, told the New York Times. Instead, he explains, Democrats will let the Republicans look foolish as the deficit grows larger under their control. “All of the conservatives who spent so much time in the 80’s and 90’s inveighing against the deficit,” he said, “are demonstrating the worst kind of hypocrisy.”


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