Former treasury secretary says China, Japan could ditch backing for American fiscal and current-account deficits The United States cannot expect the People's Bank of China, the Bank of Japan and other central banks to support its fiscal and current-account deficits indefinitely, former US treasury secretary Robert Rubin has warned. 'Interest rates have not been materially affected so far [by America's deficits], because private demand for capital has been relatively limited and because of the large inflow of foreign capital from central banks motivated by their own trade concerns,' said Mr Rubin, who served as presidential economic policy assistant and treasury secretary during the Clinton administration. But he cautioned that 'the foreign central banks upon whom we are so dependent ... could adjust their position because of concerns about interest rates or currency or because of their own internal reasons'. Mr Rubin, now director and chairman of Citigroup's executive committee, was speaking during a six-hour visit to Hong Kong, where he addressed Citigroup's Asia Fixed Income Conference. China, Japan and other countries with large foreign-exchange reserves have helped to prop up the US dollar and invested a large percentage of their treasuries in US government bonds, thereby guaranteeing the competitiveness of their own exports in the world's largest economy and helping to finance America's budget deficit. Foreign capital flows have also helped keep US interest rates down and domestic consumption levels up. However, the emergence of the euro as a rival reserve currency and concerns about the dollar's decline could ultimately unravel this mutually beneficial arrangement between the US and its major trading partners. 'If both domestic and foreign markets begin to fear long-term disarray, then the markets may begin to demand sharply higher interest rates on long-term debt,' Mr Rubin warned, adding that America's low personal savings - less than 1 per cent - and record-high levels of consumer debt 'at the very least make our economy more vulnerable to significant interest-rate increases'. Noting that 'things that can't go on indefinitely tend to stop', Mr Rubin rued the marked deterioration in the US government's fiscal position during the Bush administration. Since Mr Rubin left office in July 1999, a recession, generous tax cuts and the war in Iraq have reversed the fiscal surpluses achieved under the eight-year Clinton administration. 'Looking forward, independent analysts pretty much all agree that the projected [10-year] deficit is between US$5 trillion and US$5.5 trillion,' Mr Rubin said. 'The 2001 and 2003 tax cuts are estimated by the Congressional Budget Office to cost roughly US$4 trillion over the next 10 years ... That would put them at the heart of this problem.' Mr Rubin also questioned whether global markets fully appreciated the potential risks stemming from this confluence of forces. 'I believe that markets over the long run do reflect realities but that in the shorter run markets can deviate substantially from sensible judgments about future conditions,' he said. 'Moreover, the adjustments to reality can be abrupt and severe ... Whatever happens with elections, the laws of economics don't change.'