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Thursday, September 15, 2005

IMF Warns on Household Finances and Imbalances

by Calculated Risk on 9/15/2005 08:53:00 PM

The Independent reports:

Record levels of mortgage and credit card debt have left families "potentially vulnerable" to a sudden economic shock, the International Monetary Fund warned yesterday.

The world's chief financial watchdog said households in countries such as the UK and US were exposed to asset prices such as housing that were being used as collateral for their debts.

"These developments increasingly expose the household sector to the performance of asset markets," it said in its biannual review of financial stability. "Most likely, substantial asset price declines would undermine consumer confidence and reduce personal consumption."
The Sydney Morning Herald reports on the IMF warnings on global imbalances:
Imbalances between the US and the rest of the world were "clearly unsustainable" and the "issue is not whether but how they adjust", the fund said in its September 2005 World Economic Outlook.

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.

"Hence the United States' net external position would continue to deteriorate, reaching a record 50 per cent of GDP by 2010, matched by rising net creditor positions in the rest of the world," it said.

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.

The IMF report said the 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.
The warnings just keep coming and no action is taken. Are people growing numb to all the debt warnings? This reminds me of a new movie coming out (I haven't seen it, just the Ads) "Cry Wolf".