HOME	Where the World's Views of America Come into Focus

Apr. 18, 2005

By Filippis Vittorio DE

Original Article (French)

It is almost as if the planet's finance ministers had suddenly realized the extent of the threat. The profound depth of the American deficit is like an economic time bomb. It is impossible to know when it will go off, but if it is not defused in time, it will end up exploding and disrupting global economic growth.

Gathering this weekend in Washington on the sidelines of the spring meetings of the World Bank and the International Monetary Fund, finance leaders of the seven richest countries (the G7) exuded a strained confidence, guaranteeing global growth of 4.3%, after growth of 5.1% last year. But they no longer hesitate to mention the threats that weighs on this growth, most notably the U.S. trade deficit, which reached the record figure of $666 billion (5.7% of American GDP).

FLEXIBILITY

"If economic policies do not adapt to these imbalances, we run the risk of an abrupt market at a time when, for various reasons, confidence could evaporate," Rodrigo Rato, managing director of the IMF, said on Saturday. In the past, the IMF has warned of weak European growth, and has discussed the need for more structural reform in Japan to allow for more flexibility. But never has the IMF's board of directors shown so much concern over the American economic situation.

Even the World Bank is warning that the United States will not be able to live on credit indefinitely. "The correction has already begun, underlines a senior European official. The fall of the dollar vis-a-vis the euro is the first sign. In one year, the euro passed from $1 to more than $1.30. The tumble is such that products made in the U.S. benefit from a discount of more than 30%."

Up until now, the United States has financed the growth of the rest of the world. What brought such an economic change? Let's take a quick look back.

At the end of the 1990s, the United States lived to the rhythm of the "new economy." The entire world wanted to profit from an economy producing such exceptionally high yields. But, in 2001, those who had placed their money on Wall Street became disillusioned. The United States had not, after all, invented perpetual economic growth. Worse still: the Internet bubble burst -- and then came the radical economic brake that followed September 11, 2001. Financial scandals (WorldCom, Enron) complete the picture.

TREASURY BILLS

To kick-start the economic machine, the Bush administration pushed through a massive program of tax cuts and an increase in public expenditures -- a tax policy that worsens the budget deficit, on top of its external deficit. Specialists describe them as the "twin deficits."

At the same time, since 2001, the U.S. government has sold American Treasury bills to finance its budget deficit. At the Asian central banks, coffers are bursting with U.S. dollars that have accumulated thanks to the massive trade surpluses with the U.S. According to the U.S. Treasury Department, Japan held, in 2004, $720 billion of Treasury bills, that is to say one third of America's debt.

What would occur, however, if China, Japan or other countries decided to rebalance their wallets with the more profitable euro? It is this question that so many experts have started to consider.

In the most catastrophic scenario, the greenback would continue its slide in value, as the euro continues to climb, under the pressure of increasing monetary demand. Paul Krugman, one of the most listened-to American economists, has already noted a decline in the flow of dollars toward the United States.

In order to maintain its quality of life, America will be tempted to increase interest rates on the dollar or on Treasury bills in order to finance the deficit, which is exactly what the U.S. Central Bank [Federal Reserve Board] has done five times in the last two years.

"The result would be catastrophic for the developed economies. But especially for the developing countries, whose debt is calculated in dollars and at fluctuating rates," said Francois Bourguignon, the World Bank's chief economist. The most optimistic thing that can be said about this calamitous scenario is that it is only theoretical. The United States argues that its accumulation of deficits is due not only to U.S. policy, but to low consumption of American goods in Europe and Japan.