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More on the US dollar, global economy and possibilities, as Keith and others have been
writing on FW. Samuelson is also a
contributing editor for Newsweek. - KWC Please, Lend Us Less
By Robert J. Samuelson, Friday, September 26, 2003; Page
A27 @ http://www.washingtonpost.com/wp-dyn/articles/A2672-2003Sep25.html Someone
recently noticed that foreigners have invested heavily in U.S. Treasury
securities -- so much so that their money covers the cost of the war in Iraq
and much of the exploding U.S. budget deficit.
In the first half of 2003, foreign purchases of U.S. Treasury notes and
bonds totaled $265 billion. The
cumulative foreign holdings of federal debt amount to about $1.35 trillion, or
a hefty 36 percent of the publicly held debt. It appears that Americans can
have their cake (high government spending, low taxes) and eat it too.
Foreigners will pick up much of the tab. Well, no. Up to a point, this was true, but we
have passed that point. The
harsher truth is that foreigners' voracious appetite for U.S. treasuries
reflects deeper problems of the world economy that, in turn, harm the American
economy. About 60 percent of this
year's foreign purchases of federal securities have come from private buyers
(pension funds, insurance companies, corporations, wealthy individuals) and the
remainder from government agencies (mainly central banks -- other countries'
federal reserves). If you ask why
they like U.S. treasuries, you discover more bad news than good. Start with private investors. One reason they invest here is that
they lack good investment opportunities at home. During the 1990s they concentrated on stocks and bonds,
contributing to the stock "bubble." Now some funds have skirted into safer Treasury
securities. What's unchanged is
that economies abroad, particularly in Japan and Europe, haven't been
sufficiently dynamic to justify investing those funds at home. The appeal of American investments is
more an indicator of their weakness than our strength. The trouble is that
their weakness boomerangs on us.
Together, Europe and Japan represent almost a third of the global
economy, reports the International Monetary Fund. If these economies are feeble, the demand for U.S. exports
may be feeble. And so it's
been. From 2001 to 2003, Japan's
economy grew a pitiful 0.5 percent a year; the rate for "euroland"
(the countries using the euro) was barely better at 1.1 percent. With stronger economies abroad, the
American recovery would have been stronger. Now turn to central
banks. They invest in U.S.
Treasuries because they have surplus dollars. They have surplus dollars because, typically, their
countries run trade surpluses. To
maintain those surpluses, governments intervene in foreign exchange markets;
they buy dollars with their own currencies. The purpose: keep their currencies cheap compared with the
dollar -- and thereby make their exports more competitive. Asian nations have been especially
aggressive in pursuing trade surpluses through this strategy. Since 1996 the foreign exchange
reserves (held heavily in dollars) of China, Japan, Taiwan, Hong Kong and South
Korea have leaped from $500 billion to $1.3 trillion. Central banks could
invest their dollars in anything -- U.S. stocks, corporate bonds or real
estate. But governments favor
Treasuries for safety and "liquidity" (they can be bought and sold
easily). Again, the U.S.
economy now suffers. The
artificially depressed level of many Asian currencies undermines the
competitiveness of American exports while making Asian imports cheaper. Pressure increases on U.S. companies to
shift production abroad.
Economists at Goldman Sachs recently estimated that overseas
"outsourcing" of all sorts has cost the U.S. economy 300,000 to
500,000 jobs in the past three years.
Unsurprisingly, U.S. manufacturers are screaming for China and other
Asian countries to revalue their currencies, and Treasury Secretary John Snow
echoes their demands. (Indeed,
last weekend Snow pushed again for stronger foreign currencies.) Concerning the United
States, the language of global finance is backward. It is said that we "borrow" abroad and "need
to attract foreign capital."
In truth, foreigners are eagerly lending to us, mainly for their own
reasons. In an accounting sense,
their lending covers a big part of the U.S. budget deficit. But in ways that
matter more -- in an economic and social sense -- their lending costs us,
because it reduces domestic production and employment in the United
States. Some Americans gain from
inexpensive imports, while others lose through eliminated jobs and reduced
profits. This was not always
so. The dollar plays a unique role
in the global economy. It serves
as the world's main currency for trade and cross-border investment. The need for dollars -- by foreign
companies, banks and governments -- partly explains routine U.S. trade deficits
since the early 1980s. This demand
has kept the dollar's exchange rate too high to produce a trade balance. By itself, a modest trade deficit is
unthreatening; when the U.S. economy is at "full employment," extra
imports may curb inflation. But in
recent years, weak foreign economies and conscious currency strategies have
held the dollar at excessive levels.
The result: Despite a faltering U.S. economy, the broadest U.S. trade
deficit (the "current account'') has expanded to 5 percent of gross
domestic product. The huge foreign
investments in U.S. Treasuries are one outgrowth. They are more than a
freak fact of global finance. They
symbolize a dangerous and potentially destabilizing dependency by the rest of
the world on the American economy.
The threats to stability are plain. If the United States loses too many jobs abroad -- through
imports and outsourcing -- then the U.S. economic recovery might stumble. Or if some event shook faith in the
United States, foreign owners of U.S. stocks, bonds and Treasury securities
might try to unload their American investments, triggering a financial
panic. Neither possibility is
inevitable; both are conceivable. Americans would be better
off if foreigners lent us less -- and if foreigners could, it would signal a
sounder world economy. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> |
