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Monday, Feb. 7, 2000

Fiscal surplus, external deficit: Can the U.S. thrive on technology alone?


This year's State of the Union address by U.S. President Bill Clinton lasted 89 minutes.

Framed handsomely by the government's fiscal surplus and a continuously growing economy that has stretched into a record-breaking 107th consecutive month, the president illustrated the ambitious plans he has for his final year in office and went on to paint a rosy picture of America's future.

Delivered in an election year, the speech -- his eighth and final one -- played up his administration's achievements over the past eight years and was obviously meant to assist Vice President Al Gore's presidential campaign and the Democrats' bid to regain control of Congress.

It was only natural for the president to be optimistic, given the prospects that his nation stands to redistribute nearly $2 trillion in federal budget surpluses over the next 10 years. We Japanese can only be envious; our state coffers are nearly bare amid our revenue shortfall. But it must be noted that the U.S. economy has some major drawbacks, not the least of which are its shortage of savings and the closely connected external deficit.

The United States used to suffer from the so-called twin deficits -- the fiscal deficit and the external deficit. The turnaround in the fiscal balance is often construed as meaning the U.S. government has succeeded in eliminating one of those deficits. But it's not that simple. While the fiscal surplus means government sectors have reformed their spending practices, the expansion of the external deficit suggests that the problem of excessive spending by the private sector -- referring to the savings shortage -- increased faster than the pace of improvement in the public sector. In other words, the combined spending of the government and private sectors continued to expand, making the overall situation take a turn for the worse.

And the savings shortage is being financed by funds from overseas. America's external deficit is forecast to rise again this year, but there is no guarantee that foreign funds will be flowing in at the same level. I cannot but doubt that the current inflow will continue through the coming decade.

As of the end of December, the net debt of the United States had reached $1.5 trillion and the gross debt $7.4 trillion. The current account deficit is forecast to top 4 percent of GDP this year.

This is where Japan and the U.S. differ. True, Japan's fiscal deficit has reached a serious level as calculated as a percentage of GDP, but our deficit can still be covered by domestic savings. There is currently no need for us to rely on the money of nonresidents as the U.S. does.

Another source of uncertainty in the U.S. economy is the risk of a major plunge in the stock market, which seems to be continuing its approach to a bubble pattern.

While it is undeniable that the U.S. economy has attained higher productivity by taking full advantage of revolutionary growth in information technologies, it is fairly doubtful whether productivity has improved sharply enough to justify current share prices.

Through 401(k) pension plans and other investment tools, more than 40 percent of the U.S. population is believed to be enjoying the rise in assets caused by the stock boom. This has encouraged consumers to spend more (and save less), worsening the external balance.

Meanwhile, the stock market remains bullish, with investors believing in the future strength of the so-called dot-com industries.

But many of these high-flying firms are not producing substantial profits and thus are not contributing to reducing the external deficit. It is obvious that the United States cannot live merely on the future of such industries. The nation has so far financed the deficit by printing more dollars, but in the process the U.S. dollar's value against the yen has declined from 360 yen to the 100 yen range. Such changes in the yen-dollar rate are the currency market's evaluation of the U.S. tendency toward extravagant spending and pitiful savings. Unless this tendency is corrected, there will always be the risk that a huge mass of funds will suddenly leave the U.S., leading to a stock market crash and turning the rosy future painted by President Clinton into a stark dream.

Teruhiko Mano is an adviser to BOT Research International Ltd.


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