U.S. Economic/Financial News
Rubin Warns Deficits Could Bring 'Sudden Financial Disarray'
Former Clinton Treasury Secretary Robert Rubin warned of "sudden financial and fiscal disarray" from ongoing U.S. budget deficits. Rubin made the warning in a paper presented Jan. 4 at the American Economics Association conference, a meeting addressed by Fed Chairman Alan "Dracula" Greenspan and Fed governor Ben "Bubbles" Bernanke. The paper was co-authored by economists Peter Orszag of the Brookings Institution, and Allen Sinai of Decision Economics, Inc.
Rubin et al. warned that, "The U.S. federal budget is on an unsustainable path.... [T]he scale of the nation's projected budgetary imbalances is now so large, that the risk of severe adverse consequences must be taken very seriously." Moreover, these adverse consequences "may well be far larger and occur more suddenly" than forecast by conventional analysisthe risk of what Rubin calls a "financial and fiscal disarray."
U.S. and foreign investors would shift away from dollar-denominated assets, limiting the ability of the U.S. to finance its current account deficit, and triggering a "potentially sharp" drop in the dollar's value. Stock prices would fall.
The effects could then spread from financial markets to the real economy: jobs losses, losses by banks and financial institutions, and a "wave of bankruptcies."
IMF Sees 'Significant Risks' from Deficits, Dollar Drop
The International Monetary Fund released a report Jan. 7 warning that the massive and growing U.S. budget and current account deficits, by leading to unprecedented foreign debts, threaten disastrous impact on the global financial system and economy. U.S. budget deficits "pose significant risks for the rest of the world.... Against the background of a record-high U.S. current account deficit and a ballooning U.S. net foreign liability position, the emergence of twin fiscal and current account deficits has given rise to renewed concern," the report declared. "The United States is on course to increase its net external liabilities to around 40% of [GDP] within the next few yearsan unprecedented level of external debt for a large industrial country."
This situation could cause an abrupt drop in the dollar's value, as foreign investors dump U.S. assets, the IMF warnedblowing out the global financial system. "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 said. With U.S. net external debt at record levels, the IMF cautioned, such a dollar crash "could possibly lead to adverse consequences both domestically and abroad."
Elaborated Charles Collyns, Deputy Director of the IMF's Western Hemisphere Department: "I think the risk is substantial," of a "rapid movement in exchange rates that could have an impact on asset prices and equity prices in the United States and equity prices abroad," worsening the economic problems also in the euro area and Japan.
U.S. Treasury Secretary John Snow and Under Secretary John Taylor dismissed the IMF's warning. Taylor claimed the tax cuts gave America its shortest "recession." Snow insisted that there is no problem, that every country has deficits, and that the U.S. economy is "sound."
Echoing the IMF, on the other hand, Federal Reserve governor Donald Kohn warned that the rising large U.S. budget deficit "looks worrisome."
Fed Renews Promise of Unlimited Liquidity Pumping
In a paper presented to the American Economic Association in San Diego on Jan. 3, Federal Reserve governor Ben Bernanke and Fed director Vincent R. Reinhart (Division of Monetary Affairs) again tried to reassure markets that there are no limits to the amount of paper the Fed can print, if needed. Even at a point where "the short-term policy rate is at or near zero," and therefore, "conventional means of effecting monetary ease," that is, lowering the target for the policy rate, is no longer feasible, "monetary policy is not impotent." The authors emphasize that the Fed, under such circumstances, could still enact certain "alternative monetary strategies," specifically the following three:
1. "Providing assurance to financial investors that short rates will be lower in the future than they currently expect,
2. "changing the relative supplies of securities [such as Treasury notes and bonds] in the marketplace by shifting the composition of the central bank's balance sheet, and,
3. "increasing the size of the central bank's balance sheet beyond the level needed to set the short-term policy rate at zero ('quantitative easing')."
Concerning the second and third alternative strategy, the authors explain that the Fed, which currently holds about $670 billion of U.S. Treasuries, could, as an example, decide to shift from short-term to longer-term Treasuries. In "perhaps the most extreme example," the Fed could declare its "unlimited commitment to purchase the targeted security at the announced price." This strategy, they admit, is a bit risky, because if investors don't play along, the Fed "would end up owning all or most of those securities." The Fed could also "consider purchasing assets other than Treasury securities, such as corporate bonds or stocks or foreign government bonds. The Federal Reserve is currently authorized to purchase some foreign government bonds, but not most private-sector assets, such as corporate bonds or stocks."
Another argument for engaging in alternative monetary policies, even before the overnight rate has gone down "all the way to zero," is that the public might think that the central bank has "run out of ammunition," giving rise to some "uncertainty" in the markets. The authors, in their concluding remarks, therefore stress that "policymakers are well advised to act preemptively and aggressively to avoid facing the complications raised by the zero lower bound."
As we are already close to the "zero lower bound" in the U.S. (as well as in Japan and Switzerland), the Fed officials obviously want to imply that such extraordinary actions could now be implemented any moment.
Greenspan: Raising Rates Would Have Popped Bubble
Addressing the annual meeting of the American Economic Association Jan. 3, Federal Reserve Chairman Alan Greenspan said that he and his monetarist policy-makers could have stopped the stock-price bubble by raising interest rates, "but it would [have brought] the whole economy down with it." He claimed that "our strategy of addressing the bubble's consequences rather than the bubble itself has been successful." He alleged there has been a successful emergence from an eight-month, exceptionally mild recession in 2001.
Speaking at the same meeting Jan. 4, Fed governor Ben Bernanke, said the fact that 2.5 million factory workers have lost their jobs in the past three years, was helping keep prices under control. "On that basis I think that inflation is going to remain contained for some time," Bernanke said.
Pension Fund Insurer Warns Bailout May Be Necessary
Steve Kandarian said he was stepping down as director of the Pension Benefit Guaranty Corporation (PBGC), the Federal agency that takes over bankrupt pension plans terminated by companies, Reuters reported Jan. 7. Although he said he was stepping down for family reasons, his resignation letter to Labor Secretary Elaine Chao also cautioned that the underfunded pension system needed quick action to fix it; otherwise, a taxpayer bailout may be necessary.
"We have learned these past two years that current pension funding rules are inadequate to ensure sound funding in plans at the greatest risk of termination," Kandarian wrote. Workers and retirees have lost promised benefits, while the PBGC had suffered multibillion-dollar losses, he said.
"If we do not take action soon, these consequences will repeat themselves, or, worse, U.S. taxpayers may find themselves called upon to bail out the pension insurance system," he warned. PBGC, which insures traditional retirement plans for 44 million current workers and retirees, had as of August a record deficit of $8.8 billion in its single-employer program.
Pace of Job Cuts Rises in Fourth Quarter 2003
U.S. companies announced 1.24 million layoffs in 2003, down 16% from the level in 2002; but, the pace of job cuts increased during October-December, compared to the previous three-month period, Reuters reported Jan. 6. Planned layoffs at U.S. companies fell to 93,020 in December, job placement firm Challenger, Gray & Christmas said in its monthly report. However, employers slashed 364,346 jobs in the fourth quarter, up from 241,548 in the third quarter. For 2003, companies announced 1,236,426 job cuts; layoffs in the government and non-profit sectors, for the first time in three years, exceeded job cuts in the telecom sector.
Over the last nine years, the number of annual job cuts has risen, the report said, due in part to more and more outsourcing overseas.
|