After more than two decades during which the US bought and consumed far more than it produced, has payback time finally arrived?
A growing number of the bankers and finance officials from around the world who gathered in Washington this weekend for the annual meetings of the IMF and World Bank believe that it is near. And if it isn't, they suggest, then by golly it should be.
"The current gaps between growth in real domestic demand and real output cannot be sustained indefinitely," the fund warned in its latest review of the world economy. The imbalances in the US economy, it said, are now so big that they pose a "significant risk" to global financial stability.
The US economy has seemed to defy gravity for years, running steadily bigger trade deficits almost every year for the past two decades. Yet because growth was so strong through most of the 1990s, the economy has also acted as a vacuum cleaner, sucking in hundreds of billions of dollars in foreign investment every year. The upshot has been an impossible balancing act -- a huge need for foreign cash, yet an indefatigable domestic currency -- that has caused hand-wringing from foreign central bankers who can't believe the US keeps getting away with it.
The current account deficit -- the combination of trade in goods and services and the balance of income payments -- totaled about US$242.5 billion in the first half of this year and is on track to hit a record of nearly US$500 billion for the year.
According to the fund, the US now absorbs about 6 percent of the world's savings to finance its deficit. Japan, plagued by a stagnant domestic economy, has been exporting about 1.5 percent of the world's savings, much of that to the US. Economists at the fund and elsewhere worry that investors might abruptly sour on the dollar because prices have simply become too high or because they no longer believe the US can grow faster than the rest of the world.
"After the stock market bubble and the technology bubble, the last obvious remaining bubble is the dollar," said C. Fred Bergsten, director of the Institute for International Economics in Washington.
A steep plunge in the dollar would make foreign products more expensive in dollar terms, choking off exports to the US and growth overseas. Exports to the US have been among the world's most important sources of growth.
Bergsten believes that the risk of a collapse in the dollar remains unlikely, because the economic fundamentals of the US remain sound. But he argues that a correction is inevitable and that the Bush administration should act pre-emptively by intervening in financial markets to nudge down the dollar by an additional 10 or 20 percent.
"The dollar did come down pretty steadily and in a totally ordinary way in the first six months of this year, and there was no adverse effect on inflation," he noted. But since late July, the dollar has actually climbed slightly.
US manufacturers have been pleading for a weaker dollar for years. The high dollar is why manufacturing exports have been stagnant.
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