Here is an interesting read from NY Times about US deficit. Should Canadians have to worry about this? Economics students please stand up ;)

The trade deficit widened by 11 percent and set another record in September, the government reported today, as exports of airplanes plummeted because of a strike at Boeing and imports of natural gas and petroleum products surged in the weeks after Hurricane Katrina struck the Gulf Coast. The deficit with China also hit a record.

Farm Issues Stall Talks for a Deal on Trade The United States imported $66.1 billion more in goods and services than it exported in the month, breaking the previous record set in February when the economy registered a $60.4 billion deficit, the Commerce Department reported. The trade deficit in the first nine months of the year totaled $529.8 billion, about 18 percent higher than at this time in 2004.

Economists had been expecting the trade balance to widen to $61.5 billion in October, according to a survey by Bloomberg News.

"One-third of the widening of the deficit is the oil bill, and aircraft sales explains most of the rest," said Carl Weinberg, chief global economist at High Frequency Economics, a research firm. "It's a little superficial."

In the aftermath of Katrina, which hit New Orleans at the end of August, gasoline and natural gas imports spiked because much of the domestic production and refining in the Gulf Coast was shut down. Natural gas imports surged 30 percent, to $3.7 billion, and petroleum products and fuel oil jumped 22.8 percent, to $6.8 billion.

Crude oil imports, however, fell by $350 million, reflecting the shutdown of refineries in the Gulf Coast because of damage from Katrina and later from Hurricane Rita. A large oil import terminal off the coast of Louisiana was also shut down for several days in September because of hurricane damage.

In an indication that the surge in energy imports is easing, the Labor Department reported today that the price of petroleum-based imports fell 4.4 percent in October after surging 8 percent in September. The price of all imports dropped 0.3 percent, only the second month this year that it has fallen, after rising 2.3 percent in September. Excluding petroleum products, import prices rose by 0.8 percent in October.

The United States' trade deficit with China, the largest with any single country, rose 8.8 percent, to $20.1 billion. Exports to the country fell 17 percent and imports rose by 4 percent.

Earlier this week, American and Chinese government officials reached a deal to restrict textile imports from that country for the next three years. The Bush administration and Congress have also been pressing China to allow its currency, the yuan, to appreciate against the dollar, which would make American exports more attractive in China and Chinese imports less so.

The Chinese government reported today that its October trade surplus with the rest of the world jumped to a record $12 billion in October. So far this year, the booming country has amassed a surplus of $80.4 billion, up from $32 billion at this time last year.

All told, exports to all countries fell by $2.8 billion, virtually all of it because of falling airplane sales. That is largely a result of a machinists' strike at Boeing, which forced delayed the shipment of 30 planes, according to the company.

Exports of food fell $296 million, reflecting transportation delays caused by the shutdown of the Port of New Orleans, from which many agricultural products are shipped.

Imports rose $4 billion, most of it from industrial supplies and materials, a broad category that includes energy products. Imports of consumer goods, food and capital goods rose slightly, but the country brought fewer cars and car parts from overseas in September.

Mr. Weinberg said he expected the trade deficit to narrow in the coming months and next year as aircraft sales pick up again and energy prices continue their retreat; oil and gasoline prices are already below where they were immediately before Katrina struck. Just this week, Boeing projected an 11.7 percent increase in revenue in 2006 on higher airplane deliveries.

But other economists were less sure of an improvement in the trade balance, noting that imports may rise as American businesses restock depleted inventories. "The trend is not going to be that great if imports are picking up in momentum," said Joshua Shapiro, chief United States economist for MFR Inc., a research firm in New York.

Separately, the Labor Department reported that claims for unemployment benefits rose by about 2,000, to 326,000 last week. Compared to the same week last year, claims were down by about 5,000.

And the University of Michigan reported that its consumer confidence index rose after falling for three straight months, edging up to 79.9 this month, up from 76.5 in October.

Well this article was about the Trade deficit, not the budget deficit. Big difference.
Trade Deficit is the amount of goods imported into a country less the amount of goods exported to other countries. This difference is the deficit.
Budget Deficit is the amount the government spending exceeds it's revenues (taxes) and essentiall is gained through acquiring debt (bonds).

I'm not so worried about the trade deficit. The big reason for the huge deficit is China and Oil. In regards to China, it's due to the huge expansion of that nations country and it's ability to manufacture more which it then exports to the USA. The second is the increasing demand for oil in the USA which it has to acquire from other countries.
With China, it's not that big a deal because often the companies manufacturing in China are American companies anyways, just operating from China due to cheaper labour. Also, often USA imports rough goods, refines them to more advance final products and then exports them at the higher price.
So, trade deficits are not as bad as it seems when looking at all factors. Nevertheless, it is a cause for concern as the US has to borrow on foreign exchange markets to cover the difference. This causes weakening and instability of the US $ and reliance on foreign as opposed to domestic debt financing.
From Canad's view, not a large issue in relation to other issues affecting us right now (oil prices, manufacturing glut, rising inflation, rising interest rates, rising Cdn$)

As for actual Budget Deficit (Debt), that's a whole different problem, and that's potentially a big issue if not resolved.

^^^
Sorry but your question doesn't make sence. You are asking about the US BUDGET deficit and its effect on the Canadian economy but the article presented discusses the US TRADE deficit.
Which are you wanting to discuss?

I meant trade deficit, not us budget deficit (related though).
How is US trade deficit going to affect Canadian dollar?
How long can US maintain trade deficits of such magnitude?
What an impact will high imports have on Canadian jobs if any?

mmm .. scary chart
http://photos1.blogger.com/img/243/2888/640/Sept1.jpg

according to CTV or was it BCTV, China will replace USA as our #1 trade partner. look out for Renimnbi taking over $$.

What's even more frightening is our national debt. Bush has borrowed more money than all other presidents before him, COMBINED.

Can't find a link or article in Business Week showing comparison of national debts.. Spain and UK are not any better.

Countries with the highest External National Debt
Rank Country National Debt
Rank Country National Debt
1 Brazil $232,004,000,000
2 Russia $183,601,000,000
3 Mexico $159,959,000,000
4 China $154,599,000,000
5 Indonesia $150,875,000,000
6 Argentina $144,050,000,000
7 South Korea $139,097,000,000
8 Turkey $102,074,000,000
9 India $98,232,000,000
10 Thailand $86,172,000,000
Source: CIA World Factbook
http://www.aneki.com/debt.html

Can't find a link or article in Business Week showing comparison of national debts.. Spain and UK are not any better.

Countries with the highest External National Debt
Rank Country National Debt
Rank Country National Debt
1 Brazil $232,004,000,000
2 Russia $183,601,000,000
3 Mexico $159,959,000,000
4 China $154,599,000,000
5 Indonesia $150,875,000,000
6 Argentina $144,050,000,000
7 South Korea $139,097,000,000
8 Turkey $102,074,000,000
9 India $98,232,000,000
10 Thailand $86,172,000,000
Source: CIA World Factbook
http://www.aneki.com/debt.html

Nationmaster.com has a chart on this topic (Public debt/GDP (http://www.nationmaster.com/encyclopedia/List-of-government-debt)), as well as a forum thread discussing the US situation (Forum (http://www.nationmaster.com/forums/viewtopic.php?t=17&postdays=0&postorder=asc&start=0&sid=90a2353bd597f78b47568af275a73272)).

Remember, with the chart, the stats are a few years old, and the US is racking up debt at unprecedented levels. But the chart is still helpful with regards to other countries.

Yeah, it is quite a bit outdated. I looked at Canada's and it says our Debt/GDP ratio is 77% (which it was once upon a time).
Right now our Debt is just under $500 Billion while our GDP is 1.023 Billion. Our ratio now is in fact 48%. Quite a drop from 77%, eh!
Our Debt per person stands at $31,184/person

I find the chart Helsnikborg showed also to be flawed. How can the USA not even be on that list. They have a debt of just over 8 Trillion. That should put them way up in the top of the list. There GDP is $11,75 Trillion. They then have a Debt/GDP ratio of 68%/person.
They're debt per person stands at $27,139.

Based on these numbers, it shows that while the debt issue i spiralling at unprecedent rates, it is still manageable. USA is at the level Canada was in the late 90's before we really started to cut down our debt.
It will take a three pronged approach to get rid of the deficit and start making surpluses again.
1. The Iraqi war has to end at some time. This is draining $200-300 Billion/yr and is the number one contributing factor to the deficit.
2. The USA economy continues to recover from the mini-recession and 9/11. As the economy expands and more tax revenue is generated, this will play a pivotal part in erasing the deficit.
3. It may be necessary to raise taxes or cancel previously made tax cuts. Alternatively more spending cuts can be made, but I find that very dangerous as the Social safety net in America seems to be on the verge of collapse. Better to raise taxes in very small incremental stages so as not to upset the economy. It should also be geared at individuals and not business/corporations.

Another factor is the Hurricanes, and this is a short term defecit issue (3yrs I guess). It has the advantage of getting the federal gov't to spend heavily which creates jobs and motivates the economy. So, this is not a leading issue in discussing the deficit.

The best resource is the CIA Worldbook.
It has figures for GDP/Debt ratios in a whole series of nations compared on a number of different issues.
For the G7 the numbers for 2004 are roughly:
Japan 164%, Italy 109%, Germany & France 67%, USA 65%, UK 28%, Canada 36%

Sorry, my screw up...........I meant UK at #38% NOT 28%.

Weel its good that we are just above a third but thats still higher than where I think it to be.

merci bien Nouvellecosse, for the website :)
i'm a bit embarrassed that we are doing so well than say a decade ago

i feel it's important to point out that national debts and poverty are two different things. pls refer to ssiguy2's post:
For the G7 the numbers for 2004 are roughly:
Japan 164%, Italy 109%, Germany & France 67%, USA 65%, UK 28%, Canada 36%
Japan has one of the higherst personal savings; their national debts are probably the reason why they have such good infrastructure (hwys, bridges, bullettrain/subway.. etc.) and i wud be foolish to imagine that we are richer or better off than the US. just my US$0.02.

who the fuck are countries in debt too? aren't all (or most) countries in debt anyways?

who the fuck are countries in debt too? aren't all (or most) countries in debt anyways?

In large part G7 countries are in debt to themselves which is probably the only reason there are any social services in the United States. In theory, things like pension funds are kept in a bank account so the government infrastructure department will be the bank account and pay interest on the loan. On paper the government has a large debt to itself. In reality you simply don't have a pension and if the government went belly-up all funds paid into it would be lost.

Second, major source is the citizens of the country. Canadian citizens buy bonds, are late filing taxes for which they have a return coming, etc.

Third is private business and investors from other countries who purchase bonds and other items from the government.

For smaller countries or places that have simply gone nuts, you start getting internation organizations like the IMF being the primary holders of debt either directly or indirectly. These are usually substantial bail-outs by other countries and large banks with the requirement of balanced budgets by the borrowing country. The bail-outs take place as an insurance policy against local financial disasters. When Taiwan and other asian countries were hit by deep recessions, many American pension funds and financial institutions began to experience difficulties. The IMF moves in to correct the problem before it spreads.

how to spend more than you make by borrowing
and enticing your lenders with higher yields
once interest rates go up and domestic recession occurs
... mmm .. we're sleeping beside a giant


Greenspan Says Globalization Drives Current Account
Nov. 14 (Bloomberg) -- The U.S. has been able to support a record current account deficit in part because world investors are more willing to invest away from their home markets, Federal Reserve Chairman Alan Greenspan said.

``The rise of our deficit and our ability to finance it appears to coincide with a pronounced new phase of globalization that has emerged in the past decade,'' Greenspan said today in a speech to the Banco de Mexico. ``This phase is characterized by a major acceleration in U.S. productivity growth and the decline in what economists call home bias, the parochial tendency to invest domestic savings in one's home country.''

Interest rate increases, exchange rate adjustments or cuts in the U.S. fiscal deficit all would be unlikely to lead to large deficit reductions in the current account, the widest measure of trade, Greenspan said. The gap last year widened to $665.9 billion from $530.7 billion and totaled $195.7 billion in the second quarter, or 6.3 percent of gross domestic product.

``A nation's current account balance thus is essentially a market phenomenon that is not readily subject to rebalance by targeting one or more policy variables such as the exchange rate,'' Greenspan said. Attempting to manipulate the exchange rate between the dollar and euro would probably not succeed because residents of the U.S. and Europe wouldn't tolerate the ``required large domestic adjustments'' that would result.

Greenspan spoke by videoconference from Washington to the Mexican central bank's conference in Mexico City marking its 80th anniversary.

`Practical' Limit

The Fed chairman said the flow of capital across borders will pare down domestic investments to some ``practical'' limit and the funding of the current account deficit will be more difficult. Rising deficits ``cannot persist indefinitely'' and at some point investors will ``balk'' at further financing of U.S. consumption of imports, especially if returns on assets outside the U.S. begin to outperform those in the U.S.

Constraints on the funding of the deficit are likely to come from ``foreign investors' fear of portfolio concentrations of claims on the residents and government of the United States,'' he said.

The Fed chairman noted private investor dollar holdings have declined about 4 percentage points over the past three years, while holdings of euros gained 5 percentage points. Since 2002, central banks have shown little change in their preference for dollars.

Flexibility

Any change in reserve status of the dollar would most likely ``be readily absorbed by a far more flexible U.S. economy,'' Greenspan said. ``The flexibility of our market- driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for oil and natural gas that we have experienced over the past two years.''

Greenspan, 79, did not speak about the near-term rate outlook or give details of his analysis of the economy in the text of his remarks. He has less than three months left in his 18-year tenure as U.S. central bank chief and is giving his final round of speeches as a policy maker before Ben S. Bernanke takes over in February.

The current account deficit, the widest measure of trade in goods, services and financial transfers, widened to $394.3 billion in the first half of the year. Greenspan told Congress earlier this month that the mere fact that the deficit represents more than 6 percent of GDP is ``one of the major puzzles.''

A Puzzle

``The markets are not behaving in a way that some, if not most, analysts anticipated as the U.S. current account deficit rose above its previous high of 3 1/2 percent of GDP recorded in 1986,'' Greenspan told the Mexican central bankers today.

Greenspan's non-renewable term on the Fed's Board of Governors ends Jan. 31. Bernanke, 51, chairman of the Council of Economic Advisers, was nominated Oct. 24 by the White House to succeed Greenspan and will have a confirmation hearing before the Senate Banking Committee tomorrow.

Bernanke may continue Greenspan's tradition of discussing issues outside of monetary policy. While Bernanke doesn't plan to discuss specific legislation, ``he understood that the role of the Fed chairman was to talk about the other side of the economic ledger -- fiscal policy and other economic issues,'' New York Senator Charles Schumer said Nov. 10 after meeting with Bernanke.

Another Fed policy maker, St. Louis Fed President William Poole, said in a Nov. 9 speech that any narrowing of the current-account deficit is unlikely to disrupt the economy or be accompanied by a rapid decline in the dollar.

``A hard landing is very unlikely provided that U.S. monetary and fiscal authorities maintain sound policies,'' said Poole, who is not a voting member on the Fed's policy-making Open Market Committee this year. ``I believe the current account adjustment will be fairly slow and orderly, and that it may not begin for quite some time.''
................................................

Foreign Investors Lose Appetite for Treasuries as Deficit Rises
Nov. 14 (Bloomberg) -- The U.S. government is growing more dependent on investors from abroad just as their appetite for Treasury securities is waning.

Overseas investors, who own half of all U.S. government debt, bought 14 percent of the $79 billion in benchmark 10-year notes auctioned this year, down from 21 percent in 2004, Treasury Department data show. Bidders including foreign central banks purchased a smaller percentage of the $44 billion in three-, five- and 10-year notes the Treasury sold last week than they did a year ago.

A drop in demand may extend the slump that pushed Treasury yields to the highest this year, raising the government's borrowing costs to finance a $319 billion deficit. The U.S. will borrow a record $171 billion from January to March, about double the amount this quarter, to help pay for relief efforts after Hurricanes Katrina and Rita.

``I'd wait before buying because there is still more upside for yields,'' said Masayuki Yoshihara, a Tokyo-based investor who helps manage the equivalent of $25 billion at Sumitomo Life Insurance Co., Japan's fourth-largest life insurer. Investors ``are cautious about buying too aggressively right now with yields rising so quickly,'' he said in a Nov. 10 interview.

The yield on the benchmark 10-year note rose to 4.68 percent on Nov. 4 from 3.98 percent on Sept. 1, just after Katrina struck the Gulf Coast. The yield, which moves inversely to the note's price and is used to help determine corporate and consumer borrowing costs, ended last week at 4.57 percent.

Foreign Participation

Foreign investors bought about 21 percent of the $218 billion of two-year notes auctioned this year, down from 31 percent in 2004, according to Treasury data. They also purchased about 21 percent of the $154 billion of five-year notes sold by the Treasury, compared with 30 percent last year.

The figures don't include the results of last week's sales, which will be released in December. Indirect bidders, a larger group that includes U.S. institutional investors, foreign central banks and overseas investors, bought 34.9 percent of the debt sold. The percentage is down from 47.4 percent at the quarterly auction of three-, five-and 10-year notes a year earlier.

``Foreign buying is a very important source of demand for Treasuries and the market is concerned by evidence that it is waning,'' Joseph Di Censo, a bond strategist at Lehman Brothers Inc. in New York, said Nov. 11. ``This would obviously put upward pressure on yields. The Treasury will always be able to finance the budget deficit. The real question is at what cost.''

Foreign investors increased Treasury holdings by 9 percent this year, compared with more than 23 percent in each of the past two years. The current pace is the lowest since 2001, when net purchases rose 2.45 percent.

`Haunting' Deficit

Overseas investors owned $2.06 trillion, or half the $4.11 trillion in tradable Treasuries as of August, up from less than 40 percent three years ago and 34 percent in 2000.

Debt strategists have credited foreign investors with keeping U.S. yields in check as the budget deficit ballooned to a record $412.8 billion in fiscal 2004 ending Sept. 30 and the Federal Reserve raised interest rates 12 times. Since 2002, foreign purchases have reduced 10-year Treasury yields by 19 basis points, according to Banc of America Securities LLC. A basis point is 0.01 percentage point.

``You can't build in these constant deficits without having them come back to haunt you,'' said Richard Fisher, president of the Federal Reserve Bank of Dallas, on Nov. 3 at Harvard University in Cambridge, Massachusetts.

Japan, the largest foreign owner of Treasuries, cut its holdings of the securities this year to $684.5 billion in August from last year's peak of $699.4 billion in August, according to the latest Treasury data.

An update on international demand comes in two days with the Treasury International Capital report for September. The median forecast of three economists surveyed by Bloomberg is that net purchases of stocks, bonds and other financial assets slowed to $70 billion from $91.3 billion in August.

`Better Places'

There's little incentive to invest in U.S. debt with inflation accelerating and the Fed forecast by most economists to keep raising rates into 2006, said Don Quigley, co-manager of the $209 million Julius Baer Total Return Bond Fund in New York.

``The better places to go are overseas,'' said Quigley, who invests around the world. ``The Fed has really wanted to get ahead of inflation and stay ahead of it. You're going to see higher yields.''

Quigley's fund is up 3.1 percent over the last 12 months, the best among 23 similar funds, according to data compiled by Bloomberg. Quigley on Nov. 7 said he prefers German government debt to Treasuries even with yields on U.S. 10-year notes exceeding bunds by about the most in six years.

The median estimate of 63 economists surveyed by Bloomberg this month is for the Fed to raise its target rate to 4.75 percent by mid-2006. In June, the estimate was 4 percent.

`Good Value'

Treasury yields are the highest among the Group of Seven nations, which may help temper sales by foreign investors. The 10- year Treasury yields 105 basis points more than the German government security with a similar maturity. The difference, or spread, reached 123 basis points last month, the widest since July 1999.

``Treasuries are pretty good value,'' Douglas Roberts, who helps oversee $117 billion at Standard Life Investments Ltd. in Edinburgh, Scotland, said Nov. 9. ``I would recommend getting in at these levels.''

The rise in the U.S. dollar to a two-year high against the euro and yen may work against Treasuries, said William Prophet, an interest-rate strategist at the securities unit of UBS AG, Europe's biggest bank by assets. Gains in the currency make it more expensive for foreign investors to finance their purchases of U.S. debt.

``We have seen some Japanese accounts shunning dollar assets,'' the Stamford, Connecticut-based Prophet said Nov. 9. ``Foreign investors look at purchasing U.S. assets as two pieces: buying dollars and then buying the securities. If one of these pieces gets too rich, then the transaction becomes less attractive.''

The Fed's daily average holdings of Treasuries for foreign central banks and international accounts has climbed just 2 percent in 2005, after rising by almost 25 percent each of the last two years and 14 percent in 2002.

Good (if not long) article. At least it does'nt go into panic mode and lays out the numbers and issues at hand for the reader to digest.
One paragraph I wanted to mention:
"The Fed chairman said the flow of capital across borders will pare down domestic investments to some ``practical'' limit and the funding of the current account deficit will be more difficult. Rising deficits ``cannot persist indefinitely'' and at some point investors will ``balk'' at further financing of U.S. consumption of imports, especially if returns on assets outside the U.S. begin to outperform those in the U.S."

This goes under the assumption that deficits will continue to go upwards, which is unlikely. As mentioned in my earlier post, there are many signs that the budget deficit will go down. As for the trade deficit, this will go down if oil prices go down (which they look to be doing at this point). So, it's good that Greenspan is laying out the issues at hand and warning of the potential implications if they are ignored. However, in the end, barring unforseen events, I believe most of these problems will be remedied in a 3-5yr period.
Just my thoughts though.

add that to my wishlist too :)
I believe most of these problems will be remedied in a 3-5yr period.
in lieu of "barring unforseen events", could we be looking at cultural behavior.
Greenspan has been hiking rates for the last 12 consecutive times.
Japan's benchmark remains zero and little sign that they are successful in combating deflation.

now if we get rid of strip malls, hypermarches, superdiscount stores ..
teach our kids to sew their own fashionable gears
cook at home :eat:
live with their parents
.. .. ..

http://www.macleans.ca/topstories/world/article.jsp?content=20050307_101541_101541

Is America going broke?

Record deficits, colossal debt and no clear plan for digging itself out. If the U.S. sinks, it will take Canada down with it.

STEVE MAICH

David Walker can see the future, and it scares the hell out of him.

That wouldn't be terribly unusual if he were one of the thousands of lobbyists, legislators and activists crawling all over Washington on any given day, pontificating about the urgency of their pet issues. There is a thriving industry here built on pushing policy prescriptions for every ailment, real or imagined. But Walker isn't a lobbyist or an activist, he's an accountant. His title is comptroller general of the United States, which makes him the head auditor for the most important and powerful government in the world. And he's desperately trying to get a message out to anyone who'll listen: the United States of America's public finances are a shambles. They're getting rapidly worse. And if something major isn't done soon to solve the country's intractable budget problems, the world will face an economic shakeup unlike anything ever seen before.

Seated in his wood-panelled office in downtown Washington, Walker measures his words, trying to walk the fine line between raising an alarm and fostering panic. He cringes when he hears prominent economists warning about a financial "Armageddon," but he makes no bones about the fact the situation is dire. "I don't like using words that are overly inflammatory," he says, leaning forward in his chair. "At the same time, I think it is critically important that the American people, as well as their elected representatives, get a better understanding of just how serious our situation is."

THE NUMBERS are staggering -- a US$43-trillion hole in America's public finances that's getting worse every day. And the stakes are almost inconceivable for a generation of politicians and voters raised in relative prosperity, who've never known severe economic hardship. But that plush North American lifestyle to which we've all grown accustomed has been bought on credit, and the bill is rapidly nearing its due date. If the United States can't find a way to pay up, the results will spill beyond national borders, spreading economic misery far and wide. In Canada, the country whose financial well-being is most tightly tied to trade with the U.S., there wouldn't be a single region or industry left untouched by a fiscal shock south of the border.

It's the looming presence of this potential crisis that brings Walker to this office every day, through the doorway with the words "Honesty Accountability Reliability" inscribed above, in hopes that someone will listen and take up the challenge before it's too late. "The sooner we start fixing this, the better," he says, "because right now the miracle of compounding is working against us. Debt on debt is not good. We have to first stop digging, and then figure out how we're going to fill the hole."

HOW DID THE U.S. GET INTO THIS MESS?
In January 2001, George W. Bush took over leadership of a nation that was on its most solid financial footing in decades, thanks to years of strong economic growth and a booming stock market. That very month, the Congressional Budget Office projected that the federal government could expect US$5.6 trillion in surpluses over the coming 10 years. The key political issue of the day was how to spend the windfall. Bush's team was determined to return the money to the voters in the form of massive and widespread tax relief. What the world didn't know was that this surplus cash was largely illusory, the result of faulty bookkeeping.

The CBO's rosy outlook was based on a few deeply flawed assumptions, in particular that most government spending would not exceed the pace of inflation over the following decade, even though the rest of the economy and tax revenues were projected to grow much faster. Laurence Kotlikoff, a professor of economics at Boston University and a prominent critic of U.S. budgetary planning, released a paper that year drawing attention to what he called the CBO's "fiscal fantasy." But his was a single, lonely voice, and few on Capitol Hill were listening. The tax-cut agenda had taken hold, and there would be no stopping it.

The CBO and other agencies have since gone back and found that a more realistic surplus projection would have been US$2.2 trillion -- over 60 per cent less than initially thought. And that cushion quickly disappeared as Bush whittled or eliminated one tax provision after another, from the marriage tax and personal income tax rates to capital gains, gifts and dividends. The Center for Budget and Policy Priorities, a Washington think tank, estimates that between 2001 and 2004, federal tax revenue dropped by some US$600 billion. Most of the tax cuts introduced so far are temporary, but the Republicans have made it clear they intend to make the reductions permanent before the end of the current term.

In the midst of this tax-relief bonanza, and nine months into the new President's first mandate, came Sept. 11. The horror of the terrorist attacks profoundly changed the American public's attitude toward security and defence almost overnight. Within months, the U.S. military was on the ground in Afghanistan attacking terrorist camps and overthrowing the Taliban regime. From there, the troops moved on to Iraq. Between 2001 and 2004, the annual budget for the Pentagon and domestic security rose by US$87.1 billion, an increase of 27.5 per cent in four years. In the process, a budget that had a surplus of US$128 billion in 2001 crumbled into a deficit of US$412 billion last year -- the biggest annual shortfall in United States history.

But that's just one symptom of a much deeper fiscal problem. The U.S. is heading for a massive demographic shift as baby boomers start retiring in three years. As they do, the costs of providing social programs and health care are going to soar. "It's not the deficits of today that are the big problem," says Josh Bivens, an economist with the non-partisan Economic Policy Institute in D.C. "It's that, if you make the Bush tax cuts permanent, you're going to have deficits as far as the eye can see."

HOW BIG IS THE PROBLEM?
A trillion is a hard number to wrap your head around. Most people know it's a thousand billion -- 12 zeroes -- but even that is difficult to fathom in terms of value. So think of it like this: a trillion U.S. dollars is roughly the size of the entire Canadian economy. The world's six biggest oil companies had combined 2004 revenues just shy of US$1 trillion. And if you piled a trillion dollars in $1,000 bills, the stack would be more than 109 km high.

As of February, the U.S. national debt stood at US$7.7 trillion. And this year, the country is projecting another record deficit of US$427 billion, increasing its debt by about US$1.2 billion a day. Thanks to low interest rates, the cost of borrowing all that money remains relatively low, amounting to about 8.6 per cent of the federal budget for 2005. But when rates rise, so will the cost of carrying that debt, and current White House forecasts suggest that by 2010, those yearly costs will hit US$314 billion.

But even those projections don't adequately capture the depth of America's financial hole. For one thing, current budget estimates do not include the costs of the ongoing military campaigns in Iraq and Afghanistan, which are expected to require an additional US$80 billion in funding over the next year or so. The budget also does not factor in any costs associated with the President's plan to reform Social Security, which would give people the option of diverting some of their tax contributions into private retirement accounts they manage themselves. That plan will call for between US$1 trillion and US$2 trillion in additional government borrowing over the next decade. Bush has proposed cutting the budget deficit in half by 2010, but that strategy doesn't take into account his pledges to make permanent many of those temporary tax reductions introduced in 2001 and 2002, not to mention other tax cuts promised but not yet implemented.

What's more, none of this even begins to deal with the most pressing challenge of all: how to pay for the sunset years and medical costs of about 77 million baby boomers getting set to retire. Walker refers to this as a "demographic tidal wave" coming to swamp the country's finances. He estimates that when you take into account the unfunded liabilities of Social Security, Medicare and Medicaid -- programs that together comprise the heart of the U.S. social safety net, paying pension and health-care costs for the elderly, as well as providing medical coverage for the poor -- America's long-term budget shortfall is approximately US$43 trillion, about four times the size of the nation's economy, and more than 20 times the federal government's annual tax revenues. And some actuaries think even that number understates the size of the problem.

To most observers, it's becoming increasingly obvious that, within the next 10 years, the U.S. government will simply not be able to borrow money fast enough to keep up with its exploding expenses. That has huge implications for everything Americans do, from funding the military to protecting the environment. The Economic Policy Institute recently projected that under the current tax regime, by 2014 all government revenue would be consumed by four areas of spending: health care for the elderly and the poor, Social Security for retirees, national defence and interest on the debt. There will be no money left for such fundamental initiatives as education, transportation or justice, which means the government would be forced into ever-escalating borrowing to pay for basic programs. Walker's department projects that, under the current tax rates, interest costs on the skyrocketing national debt would be about half of all government tax revenues by 2031. Ten years later, the cost of servicing the debt will exceed all government revenues.

Laurence Kotlikoff described this burgeoning crisis four years ago in a paper entitled "The Coming Generational Storm." Last year, he provided a dark summary of the situation in a Fortune magazine article. "The U.S. government is effectively bankrupt," he wrote. The available options to close the fiscal gap? Hike income taxes by 78 per cent; slash Social Security and Medicare benefits by more than half; or eliminate all other discretionary spending. "That," he concludes, "is America's menu of pain."

HOW MUCH LONGER CAN THIS SITUATION GO ON?
The United States is the world's best customer. It buys far more from foreign countries than it sells to them, resulting in a sizable trade deficit. It also spends more on public programs than it collects in tax revenues. And to pay for all these outlays, the U.S. must attract mountains of foreign capital each year, which essentially amounts to borrowing from foreign governments and investors. This is commonly referred to as the current accounts deficit -- which was running at US$665 billion last year.

Those foreign countries don't lend out of the goodness of their hearts; for the most part they lend because the U.S. uses that money to buy goods from them and other nations. In many ways, the prosperity of the developed world, including Canada, Europe and parts of Asia, has been financed over several decades by America's rampant spending, says David Rosenberg, a Canadian who is chief North American economist for Merrill Lynch in New York. In Canada's case, by year-end this country had sold $8.8 billion more in goods to the U.S. than we bought from it -- despite the loonie's sharp rise against the greenback that made Canadian exports less affordable to Americans.

But foreign investors cannot go on forever supporting U.S. spending. A banker who holds your mortgage and car loan will get nervous if you keep coming back to up the limit on your credit cards, and international debt markets work in much the same way. The question becomes, how much longer will those investors be willing to lend to the U.S., especially at the current low interest rates, when the country appears to have no plan for meeting its long-term funding needs? The issue is even more pressing given the fact that the U.S. dollar has been falling for more than a year, decimating returns for those foreigners who invest in U.S. bonds.

Stephen Roach, chief economist at Morgan Stanley, is an outspoken critic of U.S. fiscal policy and has long warned that America's increasing reliance on foreign lending puts it at risk of a major economic shock. A sudden drop in the dollar could trigger, among other things, a stock market crash, a plunge in the real estate market, a deep recession, or all of the above. "There's nothing stable about America's dependence on the kindness of strangers," Roach wrote in a report last summer. "The funding of America is an accident waiting to happen."

At a recent meeting with fund managers in Boston, Roach said he believes there is a 90 per cent chance the country's rampant borrowing will eventually lead to a disaster for the economy. Others, including former U.S. treasury secretary Lawrence Summers and former president Bill Clinton, use less inflammatory language but have also warned that the size of U.S. deficits could compromise the nation's foreign policy and trade and security goals. For example, how long can Washington stick to its commitment to defend Taiwan against Chinese aggression when it borrows so heavily from China to support the American economy?

David Rosenberg scoffs at alarmists like Roach, but he does acknowledge the current fiscal path is unsustainable. He quotes economist Herbert Stein's old maxim: "Anything that cannot go on forever, will stop."

WHY SHOULD WE CARE?
History provides some harrowing examples of what happens when an economy collapses under the weight of unsustainable debt. One of the most chilling is Argentina in 2001. When the International Monetary Fund cut off its support for the country's escalating debt, the effect was catastrophic: the value of the national currency plunged, decimating the savings of millions. The resulting surge in inflation and sudden slowdown in consumer spending put thousands of businesses into bankruptcy within weeks. That, in turn, put further millions out of work and pushed one of South America's biggest economies into a punishing recession.

As unfathomable as it may seem, most economists think something like that could happen in the United States. "If foreign investors look at the long-run outlook for the federal budget and decide there is going to be a crash, you get a financial panic," Bivens explains. "Interest rates spike. That causes a huge recession. You'll have the dollar falling fast, so maybe inflation is sparked at the same time." And if interest rates spike, that would squeeze millions of U.S. consumers who have taken out loans against the rising value of their homes in recent years. A sudden hit to the real estate market would further constrain consumers' wallets, leading to a cycle of lower spending, and deeper recession, Bivens says.

Kotlikoff outlines a frighteningly similar scenario in his book The Coming Generational Storm. In it, he describes America in 2030 hurting from "unprecedented" tax levels, drastic reductions to social programs, unsustainable borrowing, spiralling inflation and an explosion in tax evasion. He compares the United States in 25 years to what Russia's economy looked like at the the turn of the millennium.

When he considers the numbers, Bivens can't disagree with Kotlikoff's forecast. "You've got all the ingredients for a pretty spectacular crash that a country as rich as the U.S. should just never be even close to flirting with," he says. "Another six or seven years along this path and I think we'll really be flirting with it. It's rather insane."

And this insane behaviour is a huge problem for everyone else because of America's importance to the world economy. Literally millions of workers in Canada, the U.K., Germany, Japan and elsewhere are directly or indirectly reliant on a healthy U.S. market for their jobs. "If suddenly Americans were unable to buy those goods from those countries, the countries would have to very quickly figure out how to keep their people employed," Bivens explains. Accordingly, most economists agree that a severe downturn in the United States would drag the rest of the world down with it. "If a country as big as the U.S. gets sick, everybody's gonna get sick," says Bivens.

That is a reality Canadians don't seem to fully grasp. A recent Maclean's/Rogers Media poll found only 41 per cent agree that the domestic economy is closely tied to that of the U.S.; 11 per cent choose to believe the two economies are not at all interrelated. In reality, virtually every region of the country and every major industry -- forestry, energy, mining, auto manufacturing, agriculture, technology -- depends on U.S. demand for its prosperity. If American consumers are suffering under surging unemployment, spiking interest rates, collapsing housing prices and rising inflation, those same forces will inevitably spill over into Canada.

Rosenberg, for one, believes the U.S. will restructure its fiscal policy to avoid a major crash -- but even such a process of reform is sure to have negative effects on trading partners like Canada. To close its fiscal gap and reduce its need to borrow abroad, the U.S. must find ways to boost its exports while slowing imports. In other words, it must make it more difficult for other countries to sell into its market. This is what economists refer to as a "beggar thy neighbour" policy. "For the world economy, this means the free ride is over," Rosenberg says. "The days of partying on the U.S.'s fiscal Ferris wheel are over. It's done."

HOW CAN AMERICA FIX THE PROBLEM?
On Nov. 1, 2000, as George W. Bush was campaigning for the White House, he warned an audience in Minneapolis that the Democrats would lead the nation into a future of higher taxes and slower economic growth that "could mean an end to this nation's prosperity." Bush won the election in part by portraying himself as an antidote to tax-and-spend liberals. Yet despite this bold austerity rhetoric, discretionary spending rose 23 per cent in Bush's first term. Just over four years after harping on the dangers of fiscal irresponsibility, the President is on his way to making his own warnings a reality.

Virtually every reputable independent observer who has looked at the United States budget shortfall concludes that some combination of significant tax increases and major spending cuts is unavoidable. But making those reforms happen, and closing that budget gap, will require the kind of deft touch used to dismantle a bomb. The American currency must be slowly, carefully managed lower to boost U.S. exports, but without triggering a sudden plunge in the greenback that could spark a devastating jump in inflation. Interest rates must gradually rise to ward off inflation and encourage consumers to save more of their earnings. Spending must be reined in, but not so severely that it compromises U.S. security and other public priorities. And taxes must be raised, but not so drastically that they stunt economic growth.

In many ways, the U.S. must now emulate the program that Canada instituted in the 1990s to bring its deficit spending and surging national debt under control. That was done with higher taxes, billions in spending cuts and a sharp drop in the dollar's value, combined with healthy economic growth. But south of the border the size of the challenge is much larger, the stakes are higher, and it seems clear the standard of living that millions of Americans have come to take for granted will have to change.

Walker stresses the need to make "tough decisions," and none will be tougher than tackling the runaway costs of providing health-care coverage for the elderly and the poor. Health spending in the U.S. is projected to jump 63 per cent by 2010, and to continue rising even faster after that. Most analysts agree that, at some point, the government must find a way to clamp down on those costs, yet any cuts in coverage are sure to raise an outcry from the swelling ranks of senior citizens -- a highly influential voting bloc.

Academics have proposed such reforms as a national retail sales tax, a luxury tax and a rollback of all tax cuts enacted since 2001. Others are calling for increased funding for the Internal Revenue Service to catch tax cheaters. Many insist there must be increases to Medicare premiums, as well as massive cutbacks in a wide range of social programs. But telling voters that they will have to pay more in taxes for fewer services is not an easy sell, and so far no politician has been willing to try it. In February, Bush tabled a proposed budget that would eliminate or trim back 150 government programs, but even with that, the U.S. would be racking up deficits well in excess of US$200 billion for years to come. "They're not being serious about austerity at all," Bivens says. "They're talking about very big cuts to very small programs. They mean a lot to the people getting them, but it's pennies in the overall fiscal problem."

James Horney spent more than seven years as a staffer at the Congressional Budget Office and now does analysis for the Center on Budget and Policy Priorities, a non-partisan think tank in Washington. He says the solution to the debt problem can only emerge when both parties in Congress and the President sit down to work out a "grand bargain" that includes concessions on both taxes and program spending, and a strategy for reassuring international lenders. "It requires a deal in which everything is on the table and everyone is at the table," Horney says. "One just hopes it will happen before some major cataclysm."

Walker shares that hope, and clings to his own sense of optimism. He says he has detected a noticeable shift in attitude just in the past few months, as legislators slowly come to grips with the inevitable financial reckoning. But he acknowledges that, so far, there is little concrete progress to show for his efforts. "The thing that is frustrating is that you can talk to people and point to things, but that's all you can do," he says. "You can lead them to water, but they have to drink. And they better start drinking fast -- and soon."

Well was'nt this a 'doom and gloom' article. Not that it did'nt make some excellent points and showed the severity of the problem at hand, but they go all out to scare the shit out of readers. Comparing the USA situation to the Argentinian crisis is one example.

USA is very much in the situation we in Canada were in the early 90's (on a per capita level). We managed to get out of that with some very hard decisions mind you. So, it is possible for the USA to recover. The article assumes that absolutly nothing will change and then suddenly in 2030, all hell breaks loose. Obviously something will be done about the twin deficits much more before that.

However, the solution to the USA's woes was bang on:
"Virtually every reputable independent observer who has looked at the United States budget shortfall concludes that some combination of significant tax increases and major spending cuts is unavoidable. But making those reforms happen, and closing that budget gap, will require the kind of deft touch used to dismantle a bomb. The American currency must be slowly, carefully managed lower to boost U.S. exports, but without triggering a sudden plunge in the greenback that could spark a devastating jump in inflation. Interest rates must gradually rise to ward off inflation and encourage consumers to save more of their earnings. Spending must be reined in, but not so severely that it compromises U.S. security and other public priorities. And taxes must be raised, but not so drastically that they stunt economic growth".

Could'nt of wrote it better myself. It has to be done gradually to avoid economic shockwaves.

And if one doom and gloom article is'nt enough, here's another for you guys...lol.

P.S. Does anyone know how to turn off these stupid advertisment hyperlinks over a bunch of random words? I have a Toolbar called RX which I think is causing it, but don't know how to get rid of it. Anyone got an idea?

http://www.thestar.com/NASApp/cs/ContentServer?pagename=thestar/Layout/Article_Type1&c=Article&cid=1132441821352&call_pageid=968350072197&col=969048863851&DPL=IvsNDS%2f7ChAX&tacodalogin=yes
Catalyst Canada takes on difficult questions
Nov. 20, 2005. 09:24 AM
DANA FLAVELLE
BUSINESS REPORTER



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From the organization that shamed big companies into promoting more women to the top comes a new and heretical thought: Just how much money do corporations really need to make?

In the go-go world of globalization, where time zones and technological advances make it possible to work 24/7, it's a question companies need to ask themselves, says Susan Black, president of Catalyst Canada.

How hard can they keep pushing their employees without sacrificing something?

"I think the stereotype image of the `road warrior,' the man who sacrifices family to get to the top, is a product of a certain era. At some level, it works. The harder people work, the less it costs, the more the company makes. The dirty little question no-one wants to answer is, `How much money does a corporation need to make?'" says Black.

It's just one of the provocative questions Catalyst has been asking since the U.S.-based non-profit foundation opened an office in Canada five years ago.

Originally dedicated to promoting the advancement of women, Catalyst has extended its mandate to include workplace diversity in its broadest sense.

On Wednesday, the foundation will release its latest research into the issues facing women at law firms, including the worsening problem of work-life imbalance.

"I think technology is having an enormous impact on everyone, not just women," Black says. Whether it's the Blackberry at the soccer game or the conference call with Australia at midnight "there's a widespread sense that everyone needs to be available immediately."

Catalyst started five years ago by recording the failure of Canadian business to promote women in annual surveys that show:

Women hold just 7.1 per cent of all senior officer jobs at Canada's 500 largest corporations.

Half of Canada's biggest companies have no women directors on their boards.

Behind the scenes, Catalyst advises individual companies how to fix the gender problem in their own backyards, taking surveys, running mentoring workshops, and getting executives to confront their own attitudes.

"There's a lot of skepticism about this issue," says Black.

"People have to look at their own behaviours, their own value systems. It's not like you're doing a market study on whether you should build a new semi-conductor plant."

And yet, Catalyst has managed to win over a growing number of Canada's corporate elite both as sponsors of its research and clients of its consulting services.

From just seven founding members, Catalyst now has 55 dues-paying corporate sponsors, from Alcan Inc. to RBC Financial Group toYoung & Rubicam.

More recently, Catalyst has broadened its mandate to include the problems of work-life balance (no longer just a women's issue), and the expectations of younger workers (who value personal time more than a pay increase), says Black.

In a groundbreaking study due out next year, Catalyst Canada will look for the first time at the workplace barriers facing ethnic minorities.

All this from an organization with just 10 employees working in cramped quarters only a few blocks from King and Bay Sts., headquarters to corporate Canada. For Black, the key to success has been passion combined with impeccable research credentials.

Armed with a doctorate in organizational behaviour from York University and a Master of Business Administration from Harvard University, Black also brings to the job her own work experience in the very halls she now challenges.

Before taking charge at Catalyst five years ago, Black worked in banking in Toronto and New York, then taught at York while also running her own consulting practice.

A mother of two boys, age 5 and 10, Black says "passion" has driven all her career choices.

"I didn't leave Bay St. to go have kids. I wasn't even married at the time, I just hadn't found my passion," says Black.

While teaching and consulting gave her more control over her time, she was working even longer hours than when she was in banking, she says.

The job at Catalyst came along just at the right time, she adds. She had been working as a consultant to Catalyst in the U.S. on a gender diversity project at the World Bank. Catalyst had just started doing surveys in Canada but had no full-time office or staff in place.

Black took on the job of building the business in Canada.

She had some powerful allies from the start, including Tony Comper, president and chief executive officer of BMO Financial Group and an early champion of women in business.


Five years later, Black finds herself describing the pace of corporate change as "glacial." And yet she feels Catalyst is having an impact on the public dialogue, she says. She can also measure it in the organization's expanding membership list.

Among her proudest achievements, she says, is pioneering a study that proved companies that promote women also perform better financially.

Called The Bottom Line: Connecting Corporate Performance and Gender Diversity, it has been downloaded from Catalyst's website "thousands of times," she says.

"I would very much like to see women never face the challenges I faced early in my career," she says, of her early days in corporate banking in the `80s.

"I encountered many situations where I was the only woman in the room and they weren't listening to me — again."

Last I heard the war in Iraq was costing the U.S. 6 billion a month, and with no exit strategy, that could be a big problem.

Last I heard the war in Iraq was costing the U.S. 6 billion a month, and with no exit strategy, that could be a big problem
Much of that $6B/day isn't even in the regular budget. Most of that is on top of the huge deficit in additional 'war' spending bills.

Simply put the Republicans reduced taxes, increased spending, and started two wars (Iraq and Afganistan) all at the same time. The spooky thing is there has NOT been a recession. These are fairly good times economically for pretty much everyone but Japan. Hate to see what will happen if things go down-hill before someone steps up to fix their finances.

that's one quarter of its North American workforce.

GM to Ax 30,000 Jobs, Close 12 Facilities
By DEE-ANN DURBIN, AP Auto Writer
18 minutes ago
http://news.yahoo.com/s/ap/20051121/ap_on_bi_ge/gm;_ylt=Ag16GU6YU3MuyjbwlBruuzKs0NUE;_ylu=X3oDMTA2Z2szazkxBHNlYwN0bQ--

Global Work Force Helps Fed on Inflation
By MARTIN CRUTSINGER, AP Economics Writer
49 minutes ago

WASHINGTON - While Alan Greenspan has won praise for his successful 18-year battle to keep inflation under control, he's the first to say he's had a lot of help. Among those most responsible are tens of millions of workers in China, India and Eastern Europe.

Adding all those workers to the global economy has made the Federal Reserve's inflation-fighting job easier by increasing competition. That has helped hold down labor costs — the biggest single expense for employers — and, as a result, prices.

It has come at a cost: Many of the jobs being done overseas used to be in America.

Last week, General Motors Corp. announced plans to cut more than a quarter of its North American manufacturing jobs — 30,000 in all — and close 12 facilities by 2008. Those cuts will be added to the more than 3 million manufacturing jobs — one in six — that have been lost since mid-2000.

"U.S. manufacturing jobs have withered over the past five years and many of those jobs are never coming back," said Mark Zandi, chief economist at Moody's Economy.com, a private consulting firm.

For those U.S. workers who still have jobs, the pressure on their wages has intensified as companies use the threat of moving more production overseas — where labor is far cheaper — as a way to extract concessions from their U.S. workers.

This phenomenon has hit manufacturing the hardest. But service workers are starting to be hurt as well. The ability to transmit digitally massive amounts of information to faraway places has led companies to send overseas jobs in such high-tech areas as architecture, computer software, medical services and engineering.

"It is one thing to celebrate keeping inflation in check. It is another thing to celebrate that living standards are stagnant or falling for most American workers," said Thea Lee, policy director for the AFL-CIO.

All the goods flowing into the U.S. from overseas have produced a record trade deficit that must be financed by borrowing from abroad.

In 1987, the year Greenspan took over as Fed chairman, the U.S. had a deficit in its current account, the broadest measure of trade, of $160.7 billion. Last year, that deficit set a record of $668.1 billion and is projected to go even higher this year.

Like most economists, Greenspan is an ardent supporter of free trade and has said the current account deficit should improve gradually without destabilizing the U.S. economy.

Other economists worry that foreigners suddenly might decide to stop holding so many U.S. investments, driving down the dollar's value against other currencies, as well as U.S. stock and bond prices.

Greenspan also has a benign view about how the U.S. can deal with workers who have lost jobs and or seen their wages depressed because of foreign competition. He thinks the country can solve this problem by doing a better job of educating workers so they have the skills they need for the high-tech jobs of the future, rather than the low-skill jobs that increasingly are moving to other countries.

That solution, Greenspan believes, will help combat the growing wage inequality in the U.S. This trend has seen incomes for high-income Americans rise sharply while the wages of low-income workers have been stagnant.

According to figures from the Census Bureau, the top 20 percent of U.S. households earned 50.1 percent of all income last year while the bottom 20 percent received just 3.4 percent of total income.

Other analysts are not so sure that Greenspan's approach will work, especially given that high-tech jobs are being sent to countries with well-educated workers who earn far less than Americans.

"The idea that you can educate yourself out of this problem is not accurate any more," said Jared Bernstein, an economist at the Economic Policy Institute, a liberal think tank in Washington.

Greenspan had a different worry in recent congressional testimony. He said the Fed and other central banks will have to be diligent about fighting inflation once the beneficial effect of the huge increase in the global work force begins to wane.

Greenspan will step down as Fed chairman at the end of January, so that will be a problem for Ben Bernanke, his designated successor.

Greenspan Says Budget Gap May Have `Severe' Effects

Dec. 2 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan warned of the damaging consequences of widening budget deficits on U.S. growth in two speeches today even as he said the economy is currently expanding ``at a reasonably good pace.''

Rising retirement and medical costs are major threats that loom over a ``positive'' outlook for the economy, Greenspan said in a videotaped speech shown at a Philadelphia conference today. In a second speech in London, Greenspan said a ``pernicious drift toward fiscal instability'' may lead to a ``painful'' adjustment of the record deficit in the current account, the widest measure of trade.

Today's speeches are among the final opportunities for Greenspan, 79, to discuss two favorite topics: the U.S. deficits in the budget and the current account. Greenspan retires Jan. 31. His comments suggest the budget deficit is the greater risk while the trade and investment gap may ease in time if the U.S. economy stays flexible and attractive to overseas investment.
``Crafting a budget strategy that meets the nation's longer- run needs will become more difficult the more we delay,'' Greenspan said in his Philadelphia remarks. ``In the end, the consequences for the U.S. economy of doing nothing could be severe.''

The Fed chairman said the U.S. economy ``has delivered a solid performance thus far in 2005.'' Even after the disruptions from the hurricanes, ``economic activity appears to be expanding at a reasonably good pace as we head into 2006.''

Economic Reports

Greenspan said future economic growth will be determined in part by the state of the budget, including meeting the demands of the Social Security retirement system and rising costs for government health care programs.
In neither speech did Greenspan discuss in detail the current state of the economy, which added 215,000 jobs in November, the biggest gain since July. Fed officials meet Dec. 13, and all 68 economists surveyed by Bloomberg News expect the benchmark interest rate to be raised by a quarter percentage point for a 13th straight meeting. The economy grew at a 4.3 percent annual rate from July to September, the quickest pace since the first quarter of last year, the Commerce Department said this week.
Treasury Secretary John Snow said the next federal budget would take a strict approach to so-called discretionary spending, or programs that Congress must approve each year.

``It is going to be a tough-minded, stringent budget,'' Snow said in an interview with CNBC. ``It is going to go after discretionary spending hard.''
Retirement and healthcare usually don't fall into that category of spending because they are considered to be ``entitlements.''

Budget Gap

The deficit narrowed by $94 billion in the fiscal year ended Sept. 30 to $318.6 billion. President George W. Bush has pledged to cut the deficit to the equivalent of about 2.25 percent of the economy by 2009 after tax cuts and spending increases pushed the gap to 3.5 percent of gross domestic product, or a record $412.8 billion, a year earlier.

Economists at Goldman Sachs & Co. and Lehman Brothers Inc. say rising federal spending and slower growth in tax receipts may wipe out most or all of last year's improvement in the deficit. Lehman's Drew Matus predicts the deficit will rise to $425 billion in the current fiscal year.

The Fed chairman didn't comment on interest rates or inflation in either speech.

Greenspan will retire after the Fed's January rate-setting meeting, when his non-renewable term on the Board of Governors ends. His successor, White House economic adviser Ben Bernanke, told Congress last month that he doesn't intend to comment on specific budget issues.

Investment Theories

In his London speech today, Greenspan refined his theories on how a rising tendency by governments, individuals and corporations to invest beyond their borders is helping America finance growing debt. That may also explain why the trade and investment deficit hasn't pushed the dollar lower so far, he noted.

``The reason the historically large U.S. current-account deficit has not been placing persistent pressure on the exchange rate of the U.S. dollar, at least to date, is that the deficit is a reflection of far broader and long-standing financial development in the United States and elsewhere,'' Greenspan said.
Those developments include the freer flow of money worldwide and a rising preference by investors to direct their money overseas. Greenspan said this reduction in ``home bias'' by investors has channeled more money to the U.S. and helped the country to finance its current-account deficit.
Current Account

Roger Kubarych, senior economic adviser at HVB America Inc. in New York said the current-account deficit, which was equal to 6.3 percent of the economy in the second quarter, is ``high for the U.S. and by any country's standards.'' He spoke in an interview. Greenspan suggested the deficit may gradually ease.

Greenspan saved his harshest comments for the budget deficit and said spending cuts, not tax increases, are the best way to close the gap.

``Tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth,'' he said. Such risks are ``sufficiently worrisome to warrant aiming, if at all possible,'' to use mainly spending cuts to close the gap.

Greenspan cited projections from the White House Office of Management and Budget that spending on Social Security, Medicare and Medicaid will rise to 9.5 percent of the economy in 2015 and about 13 percent in 2030 from 8 percent in the current fiscal year. If healthcare costs outpace economic growth, ``they will exert budget pressures that seem increasingly likely to make current fiscal policy unsustainable,'' he said.

Healthcare Costs

``The soaring cost of medical care for an aging population is certain to place enormous demands on our nation's resources and to exert pressure on the budget that economic growth alone is unlikely to eliminate,'' Greenspan said. Such deficits will ``cast an ever- larger shadow over the growth of living standards.''

The Fed chairman said rules that automatically limit spending, deal with ``unanticipated budget outcomes'' and let Congress regularly assess the cost of programs may help narrow the budget deficit.

The current account, Greenspan's other topic today, is the broadest measure of trade because it includes income from investments and transfer payments. The gap last year widened to a record $665.9 billion from $530.7 billion and totaled $195.7 billion in the second quarter.

The U.S. finances the current-account deficit by borrowing from overseas. Although yields on U.S. Treasury notes are less than 1 percentage point above annual inflation, foreign investors continue to buy U.S. assets.

``Most policy makers marvel at the seeming ease with which the United States continues to finance its current-account deficit,'' Greenspan said in London. ``At some point, foreign investors will balk at a growing concentration of claims against U.S. residents, even if rates of return on investment in the United States remain competitively high.''

The Fed chairman suggested it is difficult to predict when that will occur because ``globalization is changing many of our economic guideposts.''