topic by
real watcher
7/18/2002 (17:07) |
|
The market is crumbling, accounting's a mess -- and we owe the rest of the world about
a quarter of our GDP.
By Jeff Faux
Issue Date: 7.18.02
Print Friendly | Email Article
The value of the U.S. dollar has dropped more than 15 percent against the euro since February. That
may not sound like a big deal -- a bit of bad news for American tourists this summer, a bit of good news
for American manufacturers selling things abroad. But, in fact, it could be a sign that America's mounting
foreign debt is about to deal a major blow to an economy already reeling from the shock of the dot-com
meltdown and the crisis of U.S. corporate credibility.
In the last two months, warnings have come from Alan Greenspan, the world business press and the
International Monetary Fund. Two Nobel Prize–winning economists have called America's growing
foreign debt 'the greatest potential danger facing the economy in the years to come.' Neither the
administration nor the Congress, however, has heard a thing.
The fundamental problem is that for the past quarter-century, we Americans have been spending more on
imports than we have been earning from exports. And given our shop-till-we-drop culture, we do not
save enough out of our national income to cover the difference. So in order to raise the money to buy their
goods, we've been borrowing more from foreigners (by selling them American bonds) and selling them our
assets (U.S. stocks and other property). The result has been a growing annual deficit in what's called the
'current account' -- the net amount we owe to foreigners for goods, services, interest and dividends over
what they owe us. By the end of last year, our accumulated current account deficits -- our total foreign
debt -- amounted to 23 percent of our gross domestic product. Economists at Goldman Sachs predict that
if we continue on our current trajectory, our foreign debt will amount to 40 percent of GDP by 2006.
Like any enterprise whose debt payments are mounting faster than its income, we cannot go on like this.
Under normal circumstances, a country that runs a long-term trade deficit would see the value of its
currency decline as the supply held by foreigners rose. The weaker currency would make exports
cheaper, imports more expensive and investments less attractive, eventually bringing the nation's current
account back into balance. But in our case, the dollar was in great demand for a long time, which kept its
value from falling. Unlike other currencies, the dollar is widely used to pay for international transactions
and as a reserve for central banks throughout the world. Even more important, in the 1990s the
combination of a booming U.S. economy and turmoil in third-world markets made America a 'safe haven'
for foreign financiers, who were therefore willing to send their excess dollars -- earned from their U.S.
sales -- back to us in the form of purchases of American bonds and stocks.
Only this year has it become apparent, as The Economist noted in April, that 'there is a limit to the
willingness of investors to hold ever more dollar assets.' With the U.S. stock market crumbling amid
worldwide skepticism about the honesty of our corporate accounting, the flow of foreign capital into this
country has slowed dramatically. Even American investors are shifting from domestic to foreign
investments. Accordingly, the dollar has slipped this year not only against the euro, but also -- by 4.5
percent -- against a combined index of the currencies of all the countries we trade with.
Unfortunately, the dollar still has so far to go that leaving the international rebalancing to take care of
itself has become dangerous. Our current account deficit now runs about $400 billion a year, and the
Goldman Sachs number crunchers estimate that just to cut that in half, the dollar would have to fall an
'astonishing' 43 percent against the currencies of countries we trade with.
A dollar devaluation by anything near that amount -- unless we arrange to make it happen gradually, over
a very long period of time -- would drop us into a deep and prolonged recession. Interest rates would
skyrocket as investors demanded steep premiums to compensate for the risk that the value of
dollar-denominated bonds might decline further. At the same time, prices would rise in every domestic
market -- from apparel to computers -- that's now dominated by imports. Indeed, many products (TVs,
for example) are no longer produced here at all. Thus, even with a dramatically lower dollar, it would take
at least a decade to expand U.S. industrial capacity enough to rebalance the trade deficit.
And that's not all. Any reduction in the U.S. trade deficit means a reduction in the rest of the world's
trade surplus with us. Given that economic growth in many countries now depends on sales to the U.S.
market, it's hard to imagine that they would sit still for such a switch. Many are likely to resist by
devaluing their own currencies or erecting new barriers against U.S. goods. Thus, in addition to a
recession, we could end up with some very nasty trade wars.
In any event, U.S. influence in the world is bound to weaken as the dollar shrinks. Our expensive
currency has allowed us to pay for foreign bases and other overseas costs of the war on terrorism on the
cheap. Our appetite for low-priced imports, meanwhile, has enabled U.S. diplomats to win support
abroad for American policies by offering or withholding access to the U.S. consumer market. A
lower-priced dollar will make being the world's policeman more expensive.
Because our debt cannot grow faster than our income forever, a painful economic adjustment is at some
point unavoidable. But the pain, for us and for the rest of the world, could be much less if we were to
manage the dollar down gradually, in cooperation with the world's other major economies.
There's even precedent for such collective action. After Ronald Reagan's policies drove the dollar up in
the mid-1980s, the cooperative intervention by the central banks of Europe and Japan eased the dollar
back down by about 25 percent over three years. It would also help if other countries would grow their
domestic markets faster so they can buy more from us. It won't be easy to convince them. But in a global
economy, our problem is also their problem. Better to enter now into discussions of how we will adjust
rather than wait for the crisis to hit.
And certainly we should pause in our relentless drive to sign more trade-expansion agreements. At
present, with every 1 percent rise in our national income, our trade deficit grows by 2 percent. Until we
either curb our appetite for imports or become a lot better at exporting, the more we trade the deeper we
go into hock.
But the chances that the Bushies will move in these directions -- steeped as this administration is in
unilateral arrogance and laissez-faire ideology -- seem close to zero. Treasury Secretary Paul O'Neill
blithely dismisses the current account deficit as a 'meaningless concept.' (The Economist responded
that the consequences of a declining dollar would bring sleepless nights to 'a Treasury secretary who
knew what he was talking about.') Nor do such worries furrow the brow of U.S. Trade Representative
Robert Zoellick, the administration's Doctor Pangloss. Forget about imports, says Zoellick; look how our
exports are rising! His approach is akin to measuring your personal solvency by adding up the deposits
in your bank account and neglecting the withdrawals.
Most members of Congress seem equally clueless. In the heated debates over putting foreign-trade deals
on a 'fast track,' our unsustainable trade deficit has been virtually ignored. When Sen. Byron Dorgan
(D-N.D.) asked his colleagues what share of the GDP the trade deficit had to get to before they'd start to
worry, the answer was dumb silence.
Dorgan says that both Republicans and New Democrats hear any talk of the trade deficit as criticism of
free trade. And in Washington, so far, the divine right of multinational corporations to have access to the
world's cheap labor trumps any concern for the resulting red ink. Our politicians' indifference to an
out-of-control foreign debt is in striking contrast to their fretting about projections that the Social
Security system might have to start borrowing money 40 years from now. On our present path,
accumulating trade deficits will touch off a serious economic crisis long before the Social Security Trust
Fund needs a modest tax increase to cover its obligations.
Mike Wessel, a former top aide to Rep. Richard Gephardt (D-Mo.), thinks that one reason politicians are
avoiding the foreign-debt problem is that the solutions require too much heavy political lifting. 'What
politician wants to tell voters that they should be saving more and making fewer trips to the discount
store to buy low-priced imports?' he asks. And, one might add, who in the Bush administration, after
running roughshod over our allies in the war on terrorism, wants to go back to those same countries, hat
in hand, to ask them to buy more of our goods and sell us less of theirs?
Thus, according to the Washington Consensus, it's better just to wait and hope that the inevitable dollar
implosion will occur on someone else's watch. And who knows, maybe the laws of economics and human
nature don't apply to America after all. Maybe we can continue to depend indefinitely upon the financial
kindness of strangers. But don't bet on it. As the late Herb Stein, who was Richard Nixon's chief
economist, once said: 'If something can't continue forever … it probably won't.'
Jeff Faux
|
|