[Mb-civic] CBC News - U.S. LIVING BEYOND MEANS, DODGE WARNS

[CBC News Online]

This email has been sent to you by harry.sifton at sympatico.ca
The following is a news item posted on CBC NEWS ONLINE
at http://www.cbc.ca/news
____________________________________________________
U.S. LIVING BEYOND MEANS, DODGE WARNS
WebPosted Mon May 30 11:55:07 2005

OTTAWA---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.

Less directly, he chided nations such as China for rigging their
currencies to boost exports while building up larger and larger foreign-
exchange reserves, creating a lopsided world in which Asian savings
finance U.S. spending.

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."

 Trade imbalance problems highlighted

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."

A basic problem is the mismatch in national rates of saving, Dodge said.

"Specifically, over the past decade or so, we have seen many countries
outside the United States increase their saving by a very large amount,
while at the same time, the United States has reduced its saving and has
become increasingly reliant on foreign borrowing."

He said Asian countries built up foreign-exchange reserves partly as a
cushion against a recurrence of the region's 1997-98 economic crisis.

"But more importantly, policies to encourage export-led growth in many
Asian economies have exacerbated the situation. Some countries have
actively tried to prevent an appreciation of their currencies by
intervening in the foreign exchange market. In doing so, not only are
they increasing the imbalances, they are also seen by some to be securing
an unfair trade advantage and shifting the burden of global adjustment
onto others."

Reports from China last week said there was no sign Beijing would speed
up plans to revalue the country's currency, which is widely considered
artificially cheap. Such a move would make Chinese goods less competitive
in international markets and shrink the value of China's huge official
holdings of U.S. government securities.

On Monday, Beijing reacted sharply to U.S. and European moves to restrict
imports of Chinese clothing and textiles, which have flooded into western
markets since a quota system expired in January. China cancelled plans to
increase export taxes on many garments as a voluntary move to handicap
its own producers, the Associated Press reported.

Copyright (C) 2005 CBC. All rights reserved.