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Market turbulence demands serious action on U.S. deficit

08-10-2011 15:13 BJT

WASHINGTON, Aug. 9 (Xinhua) -- The recent global market turbulence may force Washington's politicians back to the drawing board to find real solutions to the nation's skyrocketing debt and deficit, according to an economics expert.

C. Fred Bergsten, director of the Peterson Institute for International Economics, said the debt-ceiling legislation Congress passed last month was just a set of procedures aimed at reducing the deficit over time but did not actually take effect by itself.

"That is not good enough," Bergsten told Xinhua during an exclusive interview Tuesday. "The markets are responding in part to the failure of the legislation to take specific actions that are credible and effective."

FACTORS BEHIND MARKET CHAOS

The U.S. stock market plummeted on the heels of Friday's news that Standard & Poor's (S&P), one of the world's three major credit rating agencies, downgraded the U.S. credit rating for the first time in the nation's history.

"It's a combination of things that had led to the weakness of the equity markets here in the U.S. and Europe, and in Asian markets as well," said Bergsten, a former assistant secretary of the U.S. Treasury.

The factors included a bleak economic outlook in the U.S., policy implications from the debt-ceiling legislation and financial risks coming out of the downgrade, Bergsten said.

"We focus a lot in the discussion about the downgrade and the debt-ceiling legislation," he said, "but maybe the most important development over the last couple of weeks was the sharp reduction in the estimate of the U.S. economic growth."

The U.S. economy expanded 1.3 percent in the second quarter this year, far below market expectations. First-quarter growth rate was revised downward to only 0.4 percent, the weakest since the recession ended two years ago. The revisions going back several years showed the recession had been worse than people had thought earlier.

All these come at a time when the U.S. and Europe were under severe pressure to trim debts and deficits, which called for policies that would slow down the economy even further, Bergsten said.

Editor:Wang Xiaomei |Source: Xinhua

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