http://www.iht.com/articles/2009/01/30/bus...;WT.mc_ev=clickWorld worries how U.S. will pay for stimulus
By Nelson D. Schwartz Published: January 30, 2009
DAVOS, Switzerland: Even as the U.S. Congress looks for ways to expand President Barack Obama's $819 billion stimulus package, the rest of the world is wondering how Washington will pay for it all.
Few people attending the World Economic Forum question the need to revive America's economy, the world's largest, with a package that could reach $1 trillion over two years. But the long-term fallout from increased borrowing by the U.S. government, and its potential to drive up inflation and interest rates around the world, seems to be getting more attention here than in Washington.
"The U.S. needs to show some proof they have a plan to get out of the fiscal problem," said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. "We, as developing countries, need to know we won't be crowded out of the capital markets, which is already happening."
Zedillo said that Washington, unlike most other countries, had the option of simply printing more money, because the dollar was a reserve currency for the rest of the world.
Over the long run, that could force long-term interest rates higher and drive down the value of the dollar, undermining the benefits that come with its special status.
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The focus in Washington has been on putting together a stimulus package that will attract broader political support when it comes up for a vote in the Senate. But here in Davos the talk has been about the coming avalanche of Treasury debt needed to pay for the plan, on top of the bailout measures approved last autumn, like the $700 billion Troubled Asset Relief Program or TARP
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Even before Obama walked through the White House door, there were plans for $1 trillion of new debt," said Niall Ferguson, a Harvard University historian who has studied borrowing and its impact on national power.
He now estimates that $2.2 trillion in new government debt will be issued this year, assuming the stimulus plan is approved.
"You either crowd out other borrowers or you print money," Ferguson added. "There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long term."
Ferguson was particularly struck by the new borrowing because the roots of the current crisis lay in an excess of American debt at all levels, from individual homeowners with subprime mortgages to Wall Street banks who let their balance sheets balloon.
"This is a crisis of excessive debt, which reached 355 percent of American gross domestic product," he said. "It cannot be solved with more debt."
Ferguson is skeptical about the Keynesian thinking behind Obama's plan - rather than borrowing and spending to stimulate the economy, he favors corporate tax cuts. But even supporters of the plan like Zedillo and Stephen Roach, the chairman of Morgan Stanley Asia, have called on the White House to address quickly how it will pay for the spending in the long term.
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