Since the early 1980s, the
United States has been the major destination for foreign goods on a global
scale. With an increasing part of these imports being financed by debt creation,
the international monetary system has been swamped with liquidity. A financial
bubble has emerged and penetrated each corner of domestic and international
financial markets.
The funding of the US economy by foreign investors
enabled the U.S. to spend rather freely. The United States could act as the
global borrower and as the international lender of the last resort at the same
time. This way, the role of the United States as the main provider of
international liquidity has been perverted and an unsustainable situation has
emerged.
The net external investment position of the United States now
is negative at more than two trillion US dollars. With the absence of private
savings and growing government deficits, the need of external financing is
growing. Whatever may be the appropriate political reasons for the US
government's new geo-strategic aims, economically the consequences will be a
cost push, and the risks are mounting that the U.S. will be headed for an
economic and financial disaster when foreign funding of its expenditures should
collapse.
The current global financial system is tilted towards
favouring excessive absorption by the United States as it shows up in the
current account imbalances. For some time, a structure like that is highly
beneficial for the economy, which has the privilege of providing international
liquidity. The country that issues the global currency gets a free lunch as long
as its debt certificates serve as international means of payments. At some
point, however, the system must necessarily go into reverse, when the
discrepancy between the issue of debt and the productive capacity becomes too
large.
Various factors are already in place and gaining force that will
contribute to reverse the past pattern of international capital flows. While the
U.S. is entering a phase of growing financial burden due to increased security
expenditures and unilateral transfers, the provision of funds from abroad tends
to diminish, making it difficult for the United States to finance its global
aspirations.
Japan, which has long been the principal source of
financing for the US current account, provided around 100 billion US dollars
annually in order to compensate part of the record American deficits of more
than 400 billion each year since 2000. In the long run, given Japan's precarious
state of government finances and the advanced stage of the ageing process of its
population, it seems rather unlikely that Japan will be able to continue
providing funds at such a large scale for years to come.
Emerging Asia,
with China as the most prominent economy in this group, has registered current
account surpluses of almost 100 billion US dollars in the past years up from 20
billion US dollars in 1997. In China, domestic needs are already surging more
urgently making it more likely that China must shift to higher imports for such
items as oil and food.
The contribution of the European Union in terms
of current account surpluses, which was more than 107 billion in 1997, is
already in decline and will probably stabilise at around zero. In terms of
long-term capital movement, the Euro Area provided a
combined contribution to global financing by exporting capital amounting to 347
billion US dollars from 1999 to 2001 during a period when the United States
absorbed a total of 1.3 trillion US dollars from abroad.
Like Japan, the
major European capital exporting countries are facing an avalanche of rising
social costs due to an ageing population. Furthermore, the expansion of the EU
to the East will redirect trade and foreign direct investment from the United
States to Eastern Europe and to other world regions
The relative
strength of the US dollar in the past couple years reflected in large part the
massive capital inflows that came to the United States from abroad. The United
States experienced a benign circle where foreign capital for direct investment
was attracted by the high growth rates when these inflows in turn contributed to
create the superior rates of economic growth. Additionally, the massive external
financing of US bond sales�424 billion US dollars alone in 2001�helped to keep
US long-term interest rates low. The huge imports of foreign goods, which
amounted to 452 US dollars in 2000 and to 427 billion US dollars in 2001, have
kept down the domestic price level thereby contributing further to lower
interest rates and higher real growth.
The United States, due to its
unique position as the provider of the leading world currency, has been able to
largely immunise itself from the immediate consequences of a global contraction
which is already strongly felt at the periphery of the global financial system.
However, a shift or retraction of international capital flows; i.e., a
repatriation of assets out of the United States and back to Japan, Europe and
other foreign creditors, would affect the international payment ability of the
United States in a direct way because it would imply a weakening of the US
dollar and probably lead to higher interest rates. Consequently, the US economy
would face a severe economic downturn.
Given the trend that the US net
investment account is worsening while at the same time there will be rising
government deficits and increasing current transfers, the future role of the US
dollar appears problematical. Up to now the dollar could maintain its value due
to its undisputed position as the dominant international currency. This
privilege, however, does not imply that the international credit capacity of the
United States would be unlimited. With alternatives sought for and emerging�such
as the euro or the plans of a gold-based international
currency�the dollar's global role becomes increasingly vulnerable.
The
consequences of a markedly diminished position of the US dollar would be
dramatic and of global proportions. While it would affect all economies that are
closely related to the US economy, the major impact would fall on the United
States itself. A demise of the US dollar as the dominant global currency would
mean that the current relation between domestic absorption and production could
no longer be maintained. Given the time and difficulties it takes to build up
adequate production capabilities the immediate response would necessarily fall
on private demand.
|
