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Tue, Jan 17, 2006 - Page 12 News List

US' economic beer belly starting to worry analysts


Like a person packing on pounds, the US keeps adding to its flabby budget deficits, endangering the nation's economic health as well as the pocketbooks of ordinary Americans.

Here's the worry: Persistent deficits will lead to higher borrowing costs for consumers and companies, slowing economic activity.

As the country seeks to borrow ever more to finance those deficits, rates on Treasury securities would rise to entice investors. That would push up other interest rates, such as home mortgages, many auto loans, some home equity lines of credit and some credit cards.

"That's the pocketbook risk to the American consumer," said Greg McBride, a senior financial analyst at Bankrate.com, an online financial service.

For businesses, rates on cor-porate bonds would climb. It would become more expensive to borrow to pay for new plants and equipment and other capital investments.

With a succession of budget deficits, "you do expect to see higher interest rates. Where we fight about this is over how big the effects are. But they are definitely there," said James Feyrer, assistant economics professor at Dartmouth College.

The government's budget deficit last year was US$319 billion. While smaller than the record US$413 billion in 2004, it still was the third-highest ever.

A White House budget official now predicts that the deficit in the current budget year will top US$400 billion, pushed up by the costs of the Gulf Coast hurricanes. The red ink is expected to keep flowing for years.

The nonpartisan Congressional Budget Office forecasts deficits every year through 2015; that is as far out as the office projects. The White House forecast, which runs to 2010, also expects annual shortfalls.

"The budget deficit is like gaining weight. You are not really aware of it until at some point, all of a sudden, you can't do what you want to do because you are heavier. Interest rates go up and slow things down," said Brian Bethune, economist at Global Insight. "Then you go to your check up and the doctor tells you you got to lose 25 pounds."

The US' economic doctor is Federal Reserve Chairman Alan Greenspan.

Greenspan, who retires on Jan. 31 after more than 18 years at the central bank, has repeatedly urged Congress and the Bush administration to get the country's financial house in order.

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