U.S. Economic/Financial News
IMF Worried About U.S. Debt, Deficit, Housing Bubble
The International Monetary Fund, in its World Economic Outlook report released on April 19, admitted, albeit in bankerese idiom, that high oil prices, a downturn in the housing market, and the high U.S. current account deficit are threatening to careen out of control. In the press conference releasing the report, IMF officials pointed to the conundrum: the cycle of plentiful global liquidity "is turning," the director of the IMF's Research Department, Raghuram Rajan, stated, which means higher real interest rates and risk spreads. And this "should be of concern in markets where asset prices are inflated, such as housing in some countries," Rajan warned.
The IMF's report states that the U.S. deficit, which hit 6.4% of GDP last year, "makes the United States vulnerable to a swing in investor sentiment that could put downward pressure on the dollar and see a spike in long-run interest rates."
"Even more importantly, against a background of low household saving and high energy prices, a weaker housing market could trigger a more abrupt withdrawal of consumer demand than anticipated," the IMF added. Because of the use of home equity loans to fuel consumer spending and the rising rate of high risk mortgages, a slump in the real-estate market "could induce a more severe slowdown in consumption and overall GDP growth," the Fund warned, adding also that "inflationary pressures could strengthen more than anticipated, necessitating a stronger-than-expected monetary policy response."
IMF: Protectionism Now a 'Very Real Danger'
Fearing a return to protectionism in defense of national economies, the IMF is frantically calling for some sort of multilateral scheme to control the global "adjustment" they worry is now "inevitable." "Protectionism is a very real danger in the world today," Raghuram Rajan, IMF Research Department Director, fretted in opening the press conference releasing the IMF's World Economic Outlook report April 19 (see above). He continued:
"The tremendous pace of private sector globalization has prompted a public sector reaction. Some governments see their role increasingly as pandering to vociferous interest groups by obstructing change rather than educating citizens to accept it. Economic patriotism is protectionist old wine in a mislabeled new bottle and is all the more dangerous in this interconnected world. The beggar-thy-neighbor policies being contemplated by some countries in the capital accountthat is, shielding large portions of their own economy from corporate takeovers while encouraging their own companies to take advantage of the continued openness of othersdeserves to be roundly condemned.
"People tend to dismiss these as minor frictions, sand in the gears of the globalization juggernaut. History, however, suggests there is a short distance from economic patriotism to unbridled nationalism," he said.
Rajan gave no specifics on the multilateral scheme the IMF will present to the annual meeting April 22-23, because major players refuse to participate, he made clear.
Foreign Purchases of U.S. Securities Surge in February
Foreign purchases of U.S. securities in February increased by 26% from January 2006the biggest increase in three months, according to the Wall Street Journal April 18. This one-month net inflow of $86.9 billion includes purchases of U.S. Treasury debt, agency debt like Fannie Mae, U.S. stocks and corporate bonds. All categories rose except stock purchases. These figures, from the Treasury Department's monthly international capital report, are closely watched, because it is these foreign investments which are financing the U.S. trade deficit.
The major surprise was that OPEC was the No. 1 Treasuries buyershowing that big oil exporters did not diversify away from U.S. assets. OPEC raised its holdings of Treasuries by $5.9 billion in February, to $84.9 billion. Japan, China, the United Kingdom, and Taiwan also increased their Treasuries holdings.