EYE ON
AMERICA The
US, debtor nation By Peter
Morici
The United States is a debtor
nation, just like the poorest states in Africa,
Latin America and Asia. Since the fourth quarter
of last year, US citizens and businesses have paid
more dividends, interest and the like to
foreigners than they have received from abroad.
How Americans entered a debtor's life is
hardly a puzzle, but what
it means is troubling.
For most of the past 30 years the United
States has been piling
up
large trade deficits. The current account, which
includes net exports of goods, services and income
payments, has now reached a deficit of 6% of gross
domestic product (GDP), and must be financed by
capital inflows. Foreigners must purchase large
amounts of US property, stocks, bonds, bank
deposits and currency, or the current-account
deficit cannot be financed.
The US
appetite for foreign goods and services moves up
in a fairly steady fashion, other things remaining
the same, but the private-sector appetite for US
assets is erratic. When foreign purchases dip and
do not finance the current-account deficit, the
supply of US dollars in foreign-exchange markets
should exceed the demand, and the dollar should
fall in value against other major currencies. US
exports should become more competitive and imports
more expensive. In turn, the trade deficit should
shrink to an amount foreign creditors wish to
finance.
However, for decades Asian
nations, led first by Japan and now China, have
prosecuted a mercantilist development strategy.
They consistently buy dollars and securities to
keep their currencies and products cheap.
Regardless of the level of private demand
for US assets, these governments have consistently
entered foreign-exchange markets, sold their
currencies for dollars and converted the proceeds
into US bonds and bank deposits.
When
private purchases of US assets slack off, those
governments rev up purchases to keep their
currencies and their products artificially cheap
on US markets. To support these policies, they
erect arcane barriers to US exports - automobiles
and parts, heavy machinery, electronics and
software have been particular targets for their
protectionist industrial policies.
This
process has escalated during the recent economic
expansion to dangerous proportions. Each year,
China spends more than US$200 billion, or 9% of
its GDP, purchasing dollars and other foreign
currencies and converting those into debt
instruments. This provides an off-budget export
subsidy of about 25% of the value of China's
exports.
The debt Americans are incurring
is massive. Direct investment in US productive
assets provides only about 11% of the needed
funds, and the balance is obtained through the
sale of Treasury securities, corporate bonds, bank
accounts and other paper assets. Americans borrow
nearly $60 billion each month to consume more than
they produce. The total debt will exceed $6
trillion by the end of the year.
At the
same time, Americans' ability to finance this debt
is shrinking, and with it their economic security.
By running such massive deficits, the United
States is shifting resources in record amounts out
of export and import-competing industries, such as
auto parts and software, where worker productivity
and investments in research and development are
high, into non-trade-competing activities, such as
restaurants and retirement homes. This lowers GDP
immediately and cripples future growth.
Over the past five years, the process has
accelerated, as Americans, financed by China and
other Asian nations, over-invested in large houses
and shopping malls instead of research and
development, plants, equipment and software that
drive productivity growth and product innovation.
JPMorgan estimates that potential US GDP growth
has declined from 3.5% 1996-2002 to 2.7% in the
years since. Going forward, it estimates potential
growth to be even lower.
Rising debt and
falling growth are prescriptions for calamity.
The administration of President George W
Bush urgently needs to persuade China and other
Asian countries to revalue their currencies
significantly and to stop intervening in
foreign-exchange markets. But so far China has
balked at meaningful action. It has permitted the
yuan to appreciate by about 4.5% over 15 months.
That is hardly enough to have any meaningful
effect.
At the conclusion of his recent
trip to Asia, US Treasury Secretary Henry Paulson
announced the initiation of a US-China Strategic
Dialogue. We have had years of talk, now we need
strong action to combat Chinese and broader Asian
protectionism.
Unfortunately, many US
multinationals such as General Electric,
Caterpillar and General Motors are making huge
profits in the protected Chinese market, and
President Bush is reluctant to disappoint his
strongest supporters.
Branding his critics
protectionists, instead of the Chinese, Bush
appeases his domestic allies and foreign powers to
the peril of the nation.
Peter
Morici is a professor at the University of
Maryland school of business and former chief
economist at the US International Trade
Commission.
