IMF meltdown scenario

In its September 2005 World Economic Outlook the International Monetary Fund (prop. P. Wolfowitz) says that trade imbalances between the US and the rest of the world are "clearly unsustainable" and the "issue is not whether but how they adjust", It expects the US current account deficit to remain stuck at an unprecedented 6 per cent of GDP, matched by large surpluses in Japan, emerging-Asian and oil-exporting countries.

Global imbalances have been widening in the past few years. Since 1996, the U.S. current account balance has deteriorated substantially, mirrored by improvements in the current account balance of emerging Asia, oil-producing developing countries (especially in recent years), and, to a lesser extent, small industrial countries such as Switzerland, Norway, and Sweden . The euro area’s current account has remained close to balance, with divergent developments between surplus countries (Germany, the Benelux countries, and Finland) and deficit countries (such as Greece, Portugal, and Spain) (frightening graph to see 1.25).

That's the facts....now the forward looking projection as they say in the markets - or "the view from 30,000 feet not the trenches" as the elite economists like to politely say with a wry academic smile,

Current World Economic Outlook projections, based on the assumption of constant real exchange rates, suggest little improvement in global imbalances. The U.S. current account deficit is projected to remain at about 6 percent of GDP into the medium term, with some improvement in the U.S. fiscal position offset by
low private savings and rising interest payments, matched by continued large surpluses in Japan, emerging Asia, and oil-exporting countries. Hence the United States’ net external position would continue to deteriorate, reaching a record
50 percent of GDP by 2010, matched by rising net creditor positions in the rest of the world.

The IMF report canvasses a scenario where investors lose confidence as a result of these imbalances and dump US assets, causing a rapid fall in the value of the US dollar and a surge in protectionist economic policies across the world.

Combinations of protectionist pressures and falling demand for US assets could trigger volatile exchange rate adjustments and heighten the risk of a global economic slump.

Of course those assumptions about constant real exchange rates, are the kicker and this report was prepared before it got windy and wet in NOLA and surrounding areas of the deep South. Depending upon what the Fed do next week there will be a reaction on the dollar ;

Rates - up, nervous smiles all round and we are safe for a bit longer
Rates unchanged - very nervous smiles and dollar assets start to drift away a bit more
Rates down - off the cliff

The view from the trenches ? Check the gold price and stock up.

Breaking News

The Commerce Department repors the deficit in the U.S. current account totaled $195.7 billion in the 2nd Qtr. That was down 1.5 percent from the deficit in the first three months of this year -- $198.7 billion -- which was the all-time high.

Even with the slight improvement, America is on track to surpass last year's record current account deficit of $668.1 billion. While the United States so far has not had any trouble attracting the foreign money needed to finance this deficit, economists worry that at some point foreign investors will no longer want to hold such sizable sums of dollar-denominated assets.

The slight improvement meant that the second quarter deficit represented 6.3 percent of the country's total economy, down from the record level of 6.5 percent in the first quarter.