The faltering U.S. economy, already beset by skyrocketing energy prices from the Persian Gulf crisis, faces a new threat: rising world interest rates are draining away the foreign money America depends on to finance its budget deficit and other borrowing needs.
The development has added greatly to the headaches of U.S. policymakers. With a recession looming, the Bush administration has been pressuring the Federal Reserve to lower interest rates to avert a downturn.But the Fed has resisted. Many private economists believe the central bank is afraid a cut in U.S. interest rates would send even more foreigners rushing to withdraw their investments from the United States, a move which could weaken the dollar and worsen inflation prospects.
The shortage of capital and rising world interest rates are expected to be a primary topic when finance officials of the world's seven richest industrial countries gather Saturday for a review of the problems facing the world economy in the wake of Iraq's invasion of Kuwait.
Treasury Secretary Nicholas Brady and Federal Reserve Chairman Alan Greenspan will hold a daylong discussion behind closed doors with their counterparts from Japan, West Germany, Britain, France, Italy and Canada.
The finance officials will be trying to develop a coordinated response to cushion the global economy from the oil shock and the rising inflationary pressures accompanying it.
Private economists said Friday in advance of the meetings that they expect Brady and his colleagues at the very least will try to sign a communique seeking to reassure financial markets of their commitment to more closely coordinate their economic policies. But economists said mere assurances may not be enough.
"There is a real danger that interest rates will continue rising to a level that will push the entire world economy into a recession," said David Jones, an economist at Aubrey G. Lanston & Co.
The rise in world interest rates began earlier this year with fears in financial markets that the huge financing needs in Eastern Europe would drive up prices.
The increase in interest rates accelerated after Iraq's Aug. 2 invasion of Kuwait as foreign central banks tried to dampen borrowing demands to head off an inflationary spiral triggered by rising oil prices.
While West German and Japanese interest rates were rising sharply, however, U.S. rates have not kept up, prompting foreign investors to withdraw funds from the United States in favor of a higher rate of return overseas.
That in turn has sent the dollar's value tumbling on foreign exchange markets. It now stands at its lowest level in relationship to the West German mark since World War II. The dollar is also down against the Japanese yen and the British pound.
The dollar's plight aggravates the investment situation because foreign investors are reluctant to put money into a currency that is losing value, a situation Fed officials have apparently noted in deciding to resist administration pressures to lower interest rates.