2010 double dip is big risk: US economist Feldstein

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14 Jan 2010, 2310 hrs IST, REUTERS

BEIJING: The US economy faces a "significant risk" of another recession in 2010, unless the Obama administration promotes confidence it can manage
a growing fiscal deficit, a prominent Harvard University economist said on Thursday.

Without public approval, namely from investors, US bond yields will climb, taxes will rise and a fragile recovery will be short lived, Martin Feldstein told Reuters in an interview.

"I don't think the Obama administration is doing anything to reduce that risk. They are assuming the momentum is there," said Feldstein, who is also president-emeritus of the National Bureau of Economic Research, the arbiter of when US recessions begin and end.

He declined to call the chances of another recession after the US economy shrank for four consecutive quarters before growing in the third quarter of 2009. He characterised the risk of a double dip back into recession as "significant.

Feldstein is a critic of the structure of the Obama administration's fiscal stimulus programs, though thinks additional government spending will do more harm than good. At this point, the US government needs to think about the debts it has accrued, he said.

"They need to bring back a greater sense of confidence that the fiscal situation will not get out of control." The US budget deficit in the last fiscal year grew to $1.4 trillion, or 10 percent of economic output, the largest shortfall since World War Two. Long-maturity US bond yields have been creeping higher over the last year.

The 10-year Treasury yield hit a 6-month high at the end of 2009. Feldstein believes bond yields will continue to rise, though he said central banks such as China's will most likely keep recycling the US dollars bought in the market by buying short-dated Treasuries.

That will keep the yield curve, the difference between short-dated and long-dated debt, steep. In China for meetings with government officials, Feldstein said he did not think the US government would allow trade tensions between the United States and China to escalate further this year.

He also expected Beijing to loosen its grip on the yuan exchange rate and allow it to strengthen, as long as US officials do not keep publicly pressuring China to act on its exchange rate policy.

The yuan strengthened more than 6 percent between January 2008 and July 2008 to around 6.83 per dollar. Since then it has been flat as China rode out the financial crisis. "The RMB will not be a big source of conflict," he said.

Source : 2010 double dip is big risk: US economist Feldstein- International Business-News-The Economic Times