eA 167i The Jefi--it is one of the two mjor economic problems which the Adainistration inharitocd fron its precucessor, but in its first yor of office it chose t> concuntrate its efforts on stimulating business activity ant reducing thu level of unemployucnt. Even nw, despite varisus ocomomic gunsures in government expemiturs abroad, the deficit is still lnrgc, ami recently it has bugun t3 inmcrense ngain. In tho week which enicd on Juno lst, the USA golé stock fell by 30m dsllars. On June 27th, the gold stock foll by 65m dollars. Iast wouk the stock fell by another 50m dollars bringing the USA 521d reserve at 15,680n é%llars t>2 its lowest luvol for 49 years. Governaunt oxpemiture accounts for a large part of US; forcisa exchange needs. It had alruady Secn pruned and it is t> be pruned still harder - 300m dollars 2ff : military expemiiture, 500m dollars off aid, an’ so %n. It would be possible to mks bigger savings, but a large part of aii is already tied to purchases from the UA and there arc practical Limits tt» the amount by which it is wise ts cut dcfenee expenditure and aid, before other counvrics are willing t> clos. the gp.
The Sutflow of private capital is of two sotrts - short-tern am longeterm. The yutflow of private capital from the USA was 3.8 billion dollars in 1960, 2.9 billizn dollars in 1961 am 3.7 billion @ollars in 1962; these sums in each yoar accounted for slishtly mare than the whole deficit. Of ths main components in 1962, 1.3 billion dollars was Girect investment by USA companies abroad; another 1.1lbillidon doblars was long-term investaunt, largely in foreign portfolios and floans; ani n» less than 1.6 millions was short-tern lemling, mainly t>9 Camda ar throvush the Buro=icllar aarket., Tho -iort—torn cutfisw can be ba rodu ae and perhaps converted into a net inflow, by meriuz up interest rater closer to uropean levels — provided only that European countries do not rsiss their rates in return, The problian of longterm capital is mors serious. Dirs:t con trols ars; considred repugnant and rdsing domestic long-torr: rates would inhibit the tha growth of ixed invaitment in U.%, irécatry. Kennedy has therefers proposed a” tax on new U,5. purchases of forsign securities, These various measures are expe cted to svae some $2,000 m. of foreign exchange over the next 18 months,
It wo » however, be id ia t3 supp%sa that these measures theasleves will solve the USA balance 3f payments problems. Tong -tuernegpital will continue ts flow out until long-tern borrowing in Burspe ang Jpan is mite not only easier but chonpers it is the brenith >%f the Ua capital mrket tmt is onc «ff its sreetost attracticong. Direct investacnt abroad my slow dwn - the US outhoritiss are hoping for an inpeortent chinge here as US businessmen are beconins less sptimistic about the prospect of the Conmom Markut, though it will romiin lorge. Am the outflow of economic am military nid will continue . The rise in rates will at loast allevintc the iametinte problom without ¢ .ing anything important to slow down the rate of cesnomic srowth.— it is hoped.
Meanwhile, recent economic news included reports of a June decline in United States housing starts, a drop in durable goods orders and sluggish steel demand, Reactions are mixed overseas, tut in Tokyo Kakuoi Tanaka, Finance Minister faid at a press conference that the "interest equalisation tax" proposed by Kennedy might considerably affect Japan's balance of pyaments position. In Canadas, the prosident of the Montreal and Canadian Stock Ixchanges predicted a slow down in economic activity. Based on Financial Times repeste