A Dangerous Empire of U.S. Debt
by Kevin Rafferty Taken from The Standard Newspaper:
http://www.thestandard.com.hk/news_print.asp?art_id=12204&sid=6702481 Friday, February 17, 2006 News about the U.S. accounts with the rest of the world should cause grim pause for thought. They show that the United States is digging itself deeper and deeper into debt, with the potential for the global financial equivalent of a nuclear meltdown growing ever closer. Trade figures for 2005 show that the US deficit soared to reach more than US$725 billion (HK$5.65 trillion), thanks to rising oil prices and the growing influx of imports from China. The deficit with China alone was US$202 billion. US imports are almost 60 percent larger than exports and the trade deficit is 5.8 percent of US national income. The current account deficit, a more comprehensive measure of financial flows, is larger still at a whopping 6.5 percent of US national income. New estimates of the budget deficit showed the government also going deeper into hock, thanks to the swelling costs of the war in Iraq. The budget deficit is likely to reach US$400 billion. Entirely predictably, the deficit with China has led to calls from Washington for Beijing to be forced to revalue the yuan, and if it does not, then the United States should impose a tax of up to 25 percent on Chinese goods. US congressmen are blaming everyone except the real culprit - Americans themselves. A yuan revaluation, or a tax, would have to be massive to make much dent in China's exporting ability, and it would not solve the root cause of America's woes - its spendthrift ways and its inability to produce the kind of goods the world wants at an affordable price. China can make cars faster and cheaper and India can write their programs cheaper and better. Of course, other governments and other countries have been in debt before. Even now, Japan's government indebtedness amounts to about 150 percent of national income, if local government debt is properly included. But what makes the US debt more deadly and dangerous is not merely that the sums are growing faster than the world has ever seen. At the federal level, US debt has already reached US$8.2 trillion. That's US$27,000 for each American. If you add in things like the deficits on underfunded pension, social security and other programs, total US debts are almost anyone's guess, with estimates ranging from US$40 trillion all the way to US$80 trillion. Increasingly the United States is relying on the kindness of strangers to save it from going bust. In Japan's case, almost all of the government debt is owed to the Japanese people, not to foreigners. But US debt is increasingly in the hands of foreigners, who now hold trillions of dollars of it. Moreover, to pay for its spending sprees, the United States needs to import almost US$2 billion a day to pay for them. Of course, global accounts must balance and, perversely, some economists claimed that the 2005 figures showed a booming - and not a bust - US economy. Paul Blustein in The Washington Post noted that "the trade gap reflects the strength of the US economy, at least relative to other major trading partners." The logic of this is that the United States is booming and, therefore, sucks in imports faster than other sluggish economies like Europe, and Japan can afford American goods. What a turkey of an argument. Perhaps Americans will appreciate the reference to the turkey - because just like a turkey before Thanksgiving, they are strutting around feeling in charge of the barnyard because people are feeding them the best corn. Yes, America, like the favored turkey, gets special treatment. Before the coming of the US empire, countries doing foreign business settled their accounts in silver or gold, so the outflow of the precious metals would exert a sobering economic effect on a country that was spending above its means. With the global domination of the United States - and after President Richard Nixon in 1971 severed the link between gold and the US dollar - the world has been living on a pax dollarium. America, like the rest of the world, pays for its goods in a world currency but, uniquely, that currency is its own. As long as the central banks of China, Japan, South Korea and other big exporting countries are prepared to accept IOUs in the form of US Treasury paper, the United States does not have to make the forced economic adjustment that any other economy with a heavy deficit has to endure. Some economists believe that this is a wonderfully cozy deal for everyone. China and the other exporters build more and more factories to provide jobs for their people and keep their economies at full employment, while the United States imports all the knick-knacks and toys that keep its people happy. It is a deal that has its own built-in equilibrium, not least because the more US IOUs the exporting countries hold, the more costly it would be for them to try to exchange them for any other reserve asset. If Beijing or Tokyo, for example, tried to offload some of their holdings of US dollars, they hold such a stock that not only would the global currency markets suffer an earthquake, but China and Japan and all other holders would realize big losses in the real value of their reserves. But it is also a dangerous equilibrium. Had the United States used the time of massive deficits as an opportunity to make adjustments, invest in new exporting industries, and bring its labor costs under control, then the world might benefit, at least in its economics and trade relations. Instead, however, as William Bonner and his colleague Addison Wiggin argue in their hilarious but thought- provoking new book Empire of Debt, the United States has created a new and dangerous empire. Far from investing, Americans have been spending wildly. Warren Buffett has rightly nicknamed the United States as "Squanderville." The personal savings rate, which stood at 7 percent during the previous three decades - already at the bottom of global league tables - has dropped to 1 percent as Americans pile up the debt on their credit cards and remortgage their houses, seeking to extract the maximum value of the housing boom that Alan Greenspan at the US Federal Reserve conspired to create. Thus, if the supposed market price of your house has gone up from, say, US$200,000 to US$250,000, you can remortgage to have an extra US$50,000 of spending power. Morgan Stanley chief economist Stephen Roach calculated that "equity extraction" from ever-rising property values in the form of home equity cash- outs and second mortgages was worth US$710 billion in the first four years of this century, or 35 percent larger than the cumulative growth of earned wage income over the same period. What madness. Properly maintained, houses are likely to be a cost center rather than a profit center. But such is the craziness of the modern US economy that property has become the red- hot game, with houses changing hands several times even before they are built and most banks joining in the lending frenzy. "If you can fog a mirror [that is, still breathe], you can get a home loan," declared the Los Angeles Times recently. The stock market, meanwhile, according to Bonner, has become part of the gambling casino, where punters believe its place is to make them rich, rather than investing in stocks for their earnings and dividend potential. The unknown question is how long the US indebtedness is sustainable. Will it be when foreign creditors own net foreign assets equivalent to 25 percent of the US gross domestic product? That level has already been reached and only some sober academic voices have been heard crying warnings, but these are drowned out by the tributes to Alan Greenspan. Kenneth Rogoff, former chief economist at the International Monetary Fund, and Maurice Obstfeld point out that the United States is currently soaking up about 75 percent of the combined current account surpluses of the rest of the world. They argue that "any sober policymaker or financial analyst ought to regard the US current account deficit as a potential sword of Damocles hanging over the global economy." Pointing to what they call "Panglossian views," they take issue with the "deceptively reassuring" analysis offered by Greenspan that increasing global financial integration that has allowed the United States to run such large deficits will be the saving factor in cushioning the effects of their eventual unwinding. It may be that when foreign debt holdings reach 50 percent that Americans finally wake up - or that China and Japan and other creditors finally get together to tell Washington it has to mend its ways and to stop lecturing the rest of the world about how to run their economic and political regimes. George W Bush's folksy claims that God is with him and that anyone against him is a troublemaker - if not part of an empire of evil - is irksome to genuinely religious people. The Roman empire was finally brought down by costly wars on its periphery. The UK became too tired to resist calls for freedom from its far-flung empire in the face of struggles to balance its own budget and repay the debts of war. Breaking with pax dollarium is likely to be painful for everybody. A sharp drop in US dollar values would not only cost the creditors in terms of the value of their reserves, but would also set off a vicious struggle for export markets to replace the United States. At the end of the day, China, Japan and India will have their factories and their production lines and will have people who are richer and able to afford the goods they are producing, and even be able to trade with each other. The Americans will have their debts and lots of dollars to testify to a great capitalism whose virtues they ignored.
Kevin Rafferty
for The Standard
Editor's Note: Kevin Rafferty is a writer for the The Standard newspaper. The Standard is published by Sing Tao Holdings and provides readers with focused, in-depth & intelligent perspectives on Hong Kong, China & world business news.
Bonner and Wiggin's second book, Empire of Debt, is available for your reading pleasure:
Empire of Debt: The Rise of an Epic Financial Crisis | 
