US deficits 'risk crash'
PETER Costello's closest adviser fears the US is heading for a devastating financial crash that could ravage Australia's economic growth. As the Reserve Bank considers raising interest rates at its board meeting next Tuesday, Treasury Secretary Ken Henry likened the flood of money pouring into the US to support its budget and current account deficits to the stockmarket's dotcom bubble of the late 1990s. Were it suddenly to stop, there would be shockwaves felt throughout the world's economies. The financial crash feared by Dr Henry would involve a sharp fall in the US dollar and a bond market sell-off, which would push up US and world interest rates.This would hit US economic growth and, as a result, cut Chinese exports of manufactured products to the American market. In turn, this would threaten the boom in Australian mineral exports to China. Fears that the world economy is in grave danger are growing in the major financial capitals. The International Monetary Fund, which is responsible for stability of the world economy, also warned yesterday of a sudden collapse. IMF managing director Rodrigo de Rato said urgent combined international action was required to head off the dangers. The main cause of concern is the fact the US is running a trade deficit of about $US600 billion ($760 billion) and a budget deficit of about $US430 billion for 2005. US imports are almost 50per cent greater than the country's exports, with the deficit being financed by international central banks and funds managers. Despite signs that the deficit is getting bigger, money is pouring into the US from Asia and Europe at such a rate that the US has been able to keep its long-term interest rates steady at 4.2 per cent since the middle of last year. [more]