A growing budget deficit and the likelihood of troubled economic times ahead are creating a credibility crisis for the United States, Allen Sinai, chief economist for the Boston Co., warned a group of Orange County's business leaders Monday.
The federal government's spending appetite is being fed mainly by foreign lenders, and the borrower--the United States--"is looking less and less credit-worthy," he said.
Sinai spoke to 35 business and government leaders at a luncheon at the Pacific Club in Newport Beach. The luncheon was held to celebrate the official opening of the West Coast headquarters for the Boston Co.'s personal banking operations.
Sinai told business executives that the federal deficit will likely grow to $165 billion this year from $140 billion last year and could reach $170 billion in 1989. Much of the money will come from foreign lenders.
To regain credibility worldwide, he said, the nation as a whole has to start saving more money and spending less. That would make the federal government less dependent on foreign funds.
"The world expects us to solve our own problems," Sinai said. "We have to save enough to pay off our own debt."
Solving those problems, though, won't take extraordinary measures, he said.
Tax Hike Considered Essential
"Taxes will have to go up as part of any solution," he said. "But I doubt that personal income taxes or corporate income taxes will go up."
Gas and excise taxes, oil import fees and other business transaction taxes together with lower interest rates and spending cuts, he said, could raise $30 billion to $50 billion a year for the next three years and wipe out the deficit.
The deficit and the interest payments on that debt are a "big burden" on the economy, he said. But while debt to foreign lenders is a big part of the budget deficit, that is not the only place foreign money is impacting the economy.
Foreign capital coming into U.S. businesses, Sinai said, often arrives in the form of "equity kickers," in which lenders take stakes in companies, causing more money to flow out of the country as profits are siphoned home by those lenders.
Like many other economists, Sinai predicted that the nation would undergo economic hardships next year:
- A year from now, the prime interest rate could be one to two percentage points higher than it is now, pushing up borrowing rates for home, business and consumer loans.
- The inflation rate already is rising at an annual rate of 4.5% to 5%, beyond the point at which Federal Reserve Board Chairman Alan Greenspan has said the Fed will act to curtail inflation.
- The stock market will decline further this year, though not drastically. At worst, he said, the Dow Jones Industrial average could hit 1,600 points from Monday's close of 1,941. At best, the Dow could reach 2,100 points.
Inflation Tied to Robust Economy
Inflationary pressures are coming mainly from the "terrific" economy the nation is now enjoying. Sinai said the economy will continue to be robust through the end of the year, or at least until a new president is elected in November.
The foreign trade deficit is still large, but the weaker dollar is helping American firms, particularly manufacturing companies, to compete abroad. And the agriculture business in the Midwest is coming back, he said, from its weak days.
The biggest push on inflation, he said, is coming from the nearly full employment in half the country. The unemployment rate in 27 states is under 5.5%, which is close to what most economists consider full employment.