Wednesday, June 01, 2005
Bank of Canada Warns the U.S. on Debt
Bang on... The massive U.S. debt is a great big bomb waiting to tear apart the world economy. Neither Europe nor China are quite at the point that they can hold the world economy afoalt if the U.S. sinks. Give them five years and then might be able to save the global economy but not now.
Jax
Bank of Canada governor David Dodge offered a bankerly rebuke to the United States on Monday for its borrow-and-spendthrift ways, which he suggested are a threat to world economic stability. . . In the text of a speech to be given at a Montreal conference, the central bank chief warned of "large, global economic imbalances that have become the subject of increasing concern" to policy-makers. "I am referring, of course, to the persistent and growing current account deficit in the United States that is mirrored by large current account surpluses elsewhere, especially in Asia."
His comments echo those of many economists who have watched the United States evolve from the world's greatest creditor nation to the greatest debtor as Americans saved less, consumed more and imported more. China, meanwhile, took over much of the world's consumer-goods manufacturing and used its export earnings to soak up vast amounts of U.S. debt.
Supporters of the Bush administration have tended to argue that the three U.S. deficits — in international trade, current account and federal budget — do not matter to a superpower that prints the world's most widely used money.
Dodge said the imbalances won't go on forever. "At some point, they will have to be resolved. Why? For one thing, a country's external indebtedness cannot keep growing indefinitely as a share of its GDP. Eventually, investors will begin to balk at increasing their exposure to that country, even if it is a reserve-currency country, such as the United States.
"For another thing, the buildup of foreign exchange reserves by Asian countries will, eventually, feed into domestic monetary expansion and lead to higher inflation. These imbalances will ultimately be resolved, either in an orderly, or in an abrupt, disorderly way." (Link)
Jax
Bank of Canada governor David Dodge offered a bankerly rebuke to the United States on Monday for its borrow-and-spendthrift ways, which he suggested are a threat to world economic stability. . . In the text of a speech to be given at a Montreal conference, the central bank chief warned of "large, global economic imbalances that have become the subject of increasing concern" to policy-makers. "I am referring, of course, to the persistent and growing current account deficit in the United States that is mirrored by large current account surpluses elsewhere, especially in Asia."
His comments echo those of many economists who have watched the United States evolve from the world's greatest creditor nation to the greatest debtor as Americans saved less, consumed more and imported more. China, meanwhile, took over much of the world's consumer-goods manufacturing and used its export earnings to soak up vast amounts of U.S. debt.
Supporters of the Bush administration have tended to argue that the three U.S. deficits — in international trade, current account and federal budget — do not matter to a superpower that prints the world's most widely used money.
Dodge said the imbalances won't go on forever. "At some point, they will have to be resolved. Why? For one thing, a country's external indebtedness cannot keep growing indefinitely as a share of its GDP. Eventually, investors will begin to balk at increasing their exposure to that country, even if it is a reserve-currency country, such as the United States.
"For another thing, the buildup of foreign exchange reserves by Asian countries will, eventually, feed into domestic monetary expansion and lead to higher inflation. These imbalances will ultimately be resolved, either in an orderly, or in an abrupt, disorderly way." (Link)
