WASHINGTON, Jan. 7; With its rising budget deficit and ballooning trade imbalance, the United States is running up a foreign debt of such
record-breaking proportions that it threatens the financial stability of
the global economy, according to a report released Wednesday by the
International Monetary Fund.
Prepared by a team of I.M.F. economists, the report sounded a loud alarm about the shaky fiscal foundation of the United States, questioning the wisdom of the Bush administration's tax cuts and warning that large budget deficits pose "significant risks" not just for the United States but for the rest of the world.
The report warns that the United States' net financial obligations to the
rest of the world could be equal to 40 percent of its total economy within
a few years "an unprecedented level of external debt for a large
industrial country," according to the fund, that could play havoc with the
value of the dollar and international exchange rates.
The danger, according to the report, is that the United States' voracious
appetite for borrowing could push up global interest rates and thus slow
global investment and economic growth.
"Higher borrowing costs abroad would mean that the adverse effects of U.S.
fiscal deficits would spill over into global investment and output," the
report said.White House officials dismissed the report as alarmist, saying that President Bush has already vowed to reduce the budget deficit by half over the next five years. The deficit reached $374 billion last year, a record in dollar terms but not as a share of the total economy, and it is expected to exceed $400 billion this year.But many international economists said they were pleased that the report raised the issue.
"The I.M.F. is right," said C. Fred Bergsten, director of the Institute
for International Economics in Washington. "If those twin deficits of
the federal budget and the trade deficit continue to grow you are
increasing the risk of a day of reckoning when things can get pretty nasty."
Administration officials have made it clear they are not alarmed about the
United States' burgeoning external debt or the declining value of the dollar, which has lost more than one-quarter of its value against the euro in the last 18 months and which hit new lows earlier this week."Without those tax cuts I do not believe the downturn would have been one of the shortest and shallowest in U.S. history," said John B. Taylor, under secretary of the Treasury for international affairs.
Though the International Monetary Fund has criticized the United States on its budget and trade deficits repeatedly in the last few years, this
report was unusually lengthy and pointed. And the I.M.F. went to lengths to publicize the report and seemed intent on getting American attention.
But in the report, fund economists warned that the long-term fiscal outlook was far grimmer, predicting that underfunding for Social Security and Medicare will lead to shortages as high as $47 trillion over the next 70 years or nearly 500 percent of the current gross domestic product in the coming decades. Some outside economists remain sanguine, noting that the United States is hardly the only country to run big budget deficits and that the nation's
underlying economic conditions continue to be robust. In a paper presented last weekend, Robert E. Rubin, the former secretary of the Treasury, said that the federal budget was "on an unsustainable
path" and that the "scale of the nation's projected budgetary imbalance is now so large that the risk of severe adverse consequences must be taken very seriously, although it is impossible to predict when such consequences may occur."

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