6
Feb
2005

Central Bank Warns US Over Massive Deficit

Notice the last paragraph. Prices are going to go up. Anna

Central Bank Warns US Over Massive Deficit

Associated Press

London — Some of the world's major central bankers warned the United States on Friday that the international community could be running out of patience with the massive U.S. budget and trade deficits that is pushing the dollar lower and increasing the cost of their exports in America.

But U.S. Federal Reserve Chairman Alan Greenspan said before the official opening of the Group of Seven finance ministers meeting that factors, including the weaker dollar and tougher budget discipline in Congress, may finally start to restrain the growth of the trade gap.

America's own campaign to push China to untie its currency from the dollar as quickly as possible appeared to make little headway.

European Central Bank president Jean-Claude Trichet said at a conference of business leaders and government officials that it was unacceptable for developed countries to run long-term current account deficits.

"The industrialized world as a whole is in deficit, there is a current account deficit, and there is no offsetting of the U.S. current account deficit by the other industrialized countries," Mr. Trichet said.

"That of course means that we are structurally asking the rest of the world to finance us. ... It doesn't seem to me that this is an acceptable and sustainable long-term feature of the present functioning of the global economy."

The U.S. deficits are expected to be a significant item of discussion during talks Saturday among the ministers from the G7 nations — Britain, Canada, France, Germany, Italy, Japan and the United States.

The Washington administration has pledged to halve the budget deficit by 2009, but also intends to argue that trade partners concerned about the deficits should be speeding up their own growth and relying less on exports to America.

The U.S. deficits have been a drag on the dollar, putting European and Asian manufacturers who want a slice of the key U.S. consumer market at a disadvantage. The euro rose from about $1.20 (U.S.) in September to a high of $1.3667 at the end of December, and the dollar tumbled from about 111 yen in September to 102 yen toward the end of the year.

While Washington insists it has a "strong dollar" policy, many analysts believe the U.S. government is content to see the dollar fall because it makes U.S. exports cheaper.

Bank of England Governor Mervyn King said the trade and budget deficits and the purchase of large U.S. dollar reserves by Asian countries were combining to cause "global imbalances."

Mr. Greenspan said a weaker dollar should narrow the deficit by making foreign goods more expensive to American consumers and U.S. exports cheaper for foreigners. One of the reasons that has not happened, he said, is that foreign companies have been willing to take a hit on their profit margins rather than raise prices in the U.S. market.

But Mr. Greenspan said there were indications that companies have reached a point where they are no longer willing to absorb the impact of the weaker dollar and will start boosting the price of their goods in America.


//www.theglobeandmail.com/servlet/story/RTGAM.20050204.wg70204/BNStory/Front/

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