US deficits 'risk crash'
Friday, February 25, 2005 at 05:00PM PETER Costello's closest adviser
fears the US is heading for a devastating financial crash that could
ravage Australia's economic growth. As the Reserve Bank considers
raising interest rates at its board meeting next Tuesday, Treasury
Secretary Ken Henry likened the flood of money pouring into the US to
support its budget and current account deficits to the stockmarket's
dotcom bubble of the late 1990s. Were it suddenly to stop, there would
be shockwaves felt throughout the world's economies. The financial
crash feared by Dr Henry would involve a sharp fall in the US dollar
and a bond market sell-off, which would push up US and world interest
rates.This would hit US economic growth and, as a result, cut Chinese
exports of manufactured products to the American market. In turn, this
would threaten the boom in Australian mineral exports to China. Fears
that the world economy is in grave danger are growing in the major
financial capitals. The International Monetary Fund, which is
responsible for stability of the world economy, also warned yesterday
of a sudden collapse. IMF managing director Rodrigo de Rato said urgent
combined international action was required to head off the dangers. The
main cause of concern is the fact the US is running a trade deficit of
about $US600 billion ($760 billion) and a budget deficit of about
$US430 billion for 2005. US imports are almost 50per cent greater than
the country's exports, with the deficit being financed by international
central banks and funds managers. Despite signs that the deficit is
getting bigger, money is pouring into the US from Asia and Europe at
such a rate that the US has been able to keep its long-term interest
rates steady at 4.2 per cent since the middle of last year. [more]