(Original post by news)
U.S. living beyond means, Dodge warns
Last Updated Mon, 30 May 2005 13
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.
David Dodge: 'A country's external indebtedness cannot keep growing indefinitely' (CP file photo)
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.