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Mon, Nov 15, 2004 - Page 12 News List

Fed official urges deficit cut to boost savings

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The US must cut its budget deficit to finance the investments it needs to prepare for the retirement of baby boomers without borrowing from abroad, Federal Reserve Governor Edward Gramlich said.

"Our low national savings rate and our high public deficits have in effect translated into national borrowing," Gramlich said on Saturday in a speech at the University of Michigan's Gerald R. Ford School of Public Policy in Ann Arbor.

"If we were any other country in international history, it would have long ago been stopped," he said, calling the situation "unstable."

A drop in savings by individuals and government means the world's biggest economy needs foreigners to finance its budget and trade deficits. That has helped push the US dollar down against the euro and the yen for seven straight weeks. The dollar has fallen 5 percent against the euro in the past month, reaching a record low on Nov. 10, and is down 3.8 percent versus the yen.

The private savings rate fell to a record low 0.4 percent in the third quarter, and the US Treasury posted a US$412 billion budget deficit in fiscal 2004. The US current account deficit, the broadest measure of trade and financial flows, reached a record US$166.2 billion in the second quarter.

While a drop in government deficit spending may reduce economic growth, the Federal Reserve would have the room to keep interest rates lower and stimulate demand, he said.

"The Fed may actually have to do its part to boost domestic demand," Gramlich said.

"Foreign countries would have to do their part to boost domestic demand." he said.

"We are devoting a very, very low share of our output to building up the future," Gramlich said. "That is the key economic issue right now" because the US needs to prepare for the retirement of the 76 million baby boomers born between 1946 and 1964.

Central banks in China, Japan and other Asian countries are trying to limit gains in their currencies to keep their exports cheap and competitive, he said.

The US may not be able to depend on those countries to make up for its low saving rates indefinitely, he said.

"If they begin having inflation in their own countries they're probably going to have to stop," he said. "We have a pretty unstable situation in the world right now."

The solution is to cut the budget deficit, Gramlich said, adding that the government should agree to budget rules that require Congress to find new revenue sources or spending reductions for any new spending initiatives or tax cuts.

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