Posted on 16-9-2002
Debt,
Float First Sink Later
by William Greider,
The Nation September 23, 2002
The imperial ambitions of the Bush Administration, post-9/11,
are founded
on quicksand and are eventually sure to founder, but for fundamental
reasons not currently under discussion. Bush's open-ended claims
for US
power -- including the unilateral right to invade and occupy
"failed
states" to execute "regime change" -- offend international law
and are
prerogatives associated only with empire. But Bush's greater
vulnerability is about money. You can't sustain an empire from
a debtor's
weakening position -- sooner or later the creditors pull the
plug. That
humiliating lesson was learned by Great Britain early in the
last
century, and the United States faces a similar reckoning ahead.
The US financial position is rapidly deteriorating, due mainly
to
America's persistent and growing trade deficit. US ambitions
to run the
world, in other words, are heavily mortgaged. Like any debtor
who borrows
more year after year with no plausible way to reverse the trend,
a nation
sinking deeper into debt enters into an adverse power relationship
with
its creditors -- greater and greater dependency.
These creditors are both private investors and governments from
Europe
and Asia; now none of them have any incentive to disrupt their
lopsided
relationship with the superpowerful leader of the world. After
all, it
works for them: Their exports have unfettered access to the
largest
consumer market in the world, producing trade surpluses and
gaining
greater market share. Their capital, meanwhile, reaps good returns
on the
loans and investments in the American economy. But history suggests
that
with sufficient provocation, the creditor nations will eventually
assert
their leverage over the United States, however reluctantly.
That critical
juncture is likely to arrive either because the American debt
burden has
become so great that additional lending would be too risky or
because the
creditor nations want to jerk Washington's chain, perhaps to
head off
reckless new adventures. Either way, it will be a humbling moment
for
American triumphalism.
No one can know exactly what circumstances will prompt our old
friends to
give a sharp elbow to Washington and Wall Street -- that is,
refuse to
lend more or threaten to withdraw capital -- but US finance
is currently
getting a small taste of what it would feel like. Saudi Arabia
(not the
government but its wealthy private investors) has pulled as
much as $200
billion out of US financial markets in recent months, perhaps
to
diversify holdings but clearly provoked by the Bush hawks, who
are
demonizing the Saudis as the "kernel of evil" behind Islamist
terrorism.
An investment consultant in Riyadh told the Financial Times,
"People no
longer have any confidence in the US economy or in United States
foreign
policy." Extracting $200 billion from US stocks and bonds may
have
contributed to the weakening value of the dollar, but by itself
it is not
a major blow. If Asian money or Europe's were to undertake a
similar
exit, the financial quake would send damaging tremors through
virtually
every dimension of US economic life. If
severe and sustained, it could shut down economic growth and
lead to a
lower standard of living.
The threatening implications are seldom discussed with any clarity
or
candor, but the numbers are not secret. The US economy's net
foreign
indebtedness -- the accumulation of two decades of running larger
and
larger trade deficits -- will reach nearly 25 percent of US
GDP this
year, or roughly $2.5 trillion. Fifteen years ago, it was zero.
Before
America's net balance of foreign assets turned negative, in
1988, the
United States was a creditor nation itself, investing and lending
vast
capital to others, always more than it borrowed. Now the trend
line looks
most alarming. If the deficits persist around the current level
of $400
billion a year or grow larger, the total US indebtedness should
reach
$3.5 trillion in three years or so. Within a decade, it would
total 50
percent of GDP. Instead of facing this darkening prospect, Bush
and team
regularly dismiss the worldviews of these creditor nations and
lecture
them condescendingly on our superior qualities. Any profligate
debtor who
insults his banker is unwise, to put it mildly.
The specter of America's deepening weakness seems counter-intuitive
to
what people see and experience in a time of apparent continuing
prosperity -- and contradicts everything they are told by authoritative
voices. But the quicksand is real. We are already in up to our
knees.
Deep-running tides of history have been steadily undermining
America's
economic hegemony for decades. In the years after World War
II, as Japan,
Germany and many other shattered nations recovered prosperity
and
acquired world-class production, the US economic position naturally
became relatively smaller and less dominant. This shift was
achieved in
part by America's own self-interested stewardship, leading the
non-Communist world and reviving global trade, spreading investment
capital and technology through US multinationals and injecting
economic
demand in overseas markets with cold war military spending.
The postwar
economic order succeeded brilliantly, on the whole, dispersing
economic
power more broadly among the leading industrial nations and
causing those
nations' economies to be more intertwined through globalizing
finance and
production. Interdependence is not the problem, since it would
provide a
healthy foundation for maintaining a peaceable planet. The problem
is
that US leadership acts as though the changes never happened.
Instead of reformulating global governance to share power and
burdens
more broadly, a multipolar system that matches the economic
reality,
America still acts as if it runs things -- alone. And America
pays dearly
for the privilege, both through its bloated military spending
and by
accepting the lopsided trade deficits. Both are implicitly regarded
in
Washington as the burdens of leadership -- defending the world
against
terrorism on any frontier, upholding the global trading system
by serving
as "buyer of last resort" for other nations' exports.
Our sinking condition as a debtor nation was not inevitable,
in other
words, but a function of hubris -- the reluctance among US governing
elites to give up on the past glory and adjust to the new realities.
Dependency might have been averted years ago if US leadership
had
awakened fully to the financial implications and compelled major
trading
partners to do the same -- that is, to join in adjusting the
global
trading system so the United States would no longer carry alone
such
burgeoning trade deficits. Under the original terms of the General
Agreement on Tariffs and Trade, for instance, it is legal for
a nation to
impose emergency general tariffs to correct a dangerous financial
imbalance flowing from trade.
If the United States took such a provocative step, however,
it would
ignite fierce global opposition and also expose decades of triumphant
propaganda. Washington would have to confess to voters that
globalization
had become a negative proposition for the national balance sheet.
Above
all, facing reality would require US elites to resign their
inherited
role as the singular superpower that runs things -- and begin
sharing
that power with other nations. Neither political party wants
to face such
a painful retreat
on its watch. Besides, for politicians and policy-makers, it
feels good
to run the world.
In theory, this problem might still be corrected, but only in
theory,
because it is impossible to imagine such a dramatic policy reversal
from
Washington without some great crisis to provoke it. American
leadership
has instead become increasingly delusional -- I mean that literally
and
blind to the adverse balance of power accumulating against it.
Presidents
from both parties (Clinton no less than Bush) have embraced
the notion
that additional trade agreements will eventually solve the US
problem by
eliminating tariffs and other trade barriers. We have thirty
years of
evidence to prove the contrary. The gap between imports and
exports keeps
growing larger right along with each new agreement.
Elite opinion, after years of offering various faulty explanations
for
the persistent trade deficits, has now decided they do not matter.
The
new conventional wisdom describes the national economy's indebtedness
as
unimportant bookkeeping because the exchange actually benefits
all --
foreign capital invests more in the United States, and we return
the
favor by buying more of their stuff (and they lend us the money
to do
so). In fact, the long-running "trade wars," in which Washington
demanded
that Japan, Korea and others open their markets to American
goods, are
over -- principally because major US multinationals are no longer
interested in pursuing them. In every sector (save steel and
textiles),
the American companies have made peace with their foreign rivals,
joining
them through mergers and alliances or moving production into
the foreign
markets and withdrawing from competition. If you are an American
multinational with feet planted in many countries, it may be
true that US
indebtedness will have no consequences. But for homebound citizens,
whose
fate depends solely on America's balance sheet, the debt obligations
are
real.
For their own reasons, the major trading partners are reluctant
to
disrupt the status quo. The current arrangement allows them
to have it
both ways -- gaining a greater share of markets under the shadow
of US
hegemony. Privately, they recognize that the US economic position
is
steadily ebbing. But it seems wiser to let the Americans keep
their
delusions for now. The space for self-interested maneuvering
is much
greater if the United States carries the burdens and costs alone.
Despite
occasional whining, Japan and Germany are not eager to claim
a prominent
share in global leadership (both once had a go at running the
world and
it ended badly). Far better to prop up the United States financially
without forcing awareness of the shifting power.
Their reluctance resembles the American attitude early in the
last
century, when it was the ascendant economic power but did not
wish to
become a "Great Power" itself, with responsibility for maintaining
world
order. Instead, the United States propped up Britain for many
years as
the failing empire sank into unsustainable debt. British power
was
fundamentally eclipsed in 1914, but the United States provided
the
financial nurture to keep it upright, as a kind of dummy leader
in world
affairs, until after World War II.
Washington decisively pulled the plug in 1956, when Britain
(along with
France and Israel) invaded Egypt to capture the nationalized
Suez Canal.
It was the last gasp of British colonialism, and Washington
disapproved.
By withholding an IMF loan to London, the United States crashed
the
pound, forced Britain to withdraw from war and its prime minister
to
resign in disgrace. The Brits were finally relieved of their
delusions.
It is most unlikely, of course, that the US drama will play
out in a
similar way -- we are far too big and powerful by comparison
-- but
Britain's humiliation might serve as a cautionary tale for power-drunk
American statesmen. Other nations, when they feel their global
market
power is sufficiently stronger and we have become still weaker,
might
organize a transition of gradual adjustments that allows the
United
States to climb down gracefully from its long-held role. This
would be
very difficult to accomplish, however, without a real blow to
the US
standard of living, not to mention national pride.
More likely, the United States and the global system are going
to
encounter harsh bumps and ugly surprises. Japan, which has the
most to
lose if the United States taps out as "buyer of last resort,"
suggested
privately a few years back that it would accept a discreet ceiling
on its
trade surpluses with the United States -- a "managed trade"
deal the
free-market Americans rejected on principle. Richard Medley,
a global
financial consultant with inside connections in Tokyo, told
me afterward,
"One of the Japanese
strategies is to keep us from doing anything rash for the next
decade and
a half -- until they have become self-sufficient in Asia and
can go along
without us."
The European Union, meanwhile, is patiently assembling the economic
girth
and institutional confidence to act as the leading counterpoise
to
Washington. That is the essential idea of the euro -- a competing
world
currency other nations can use for trade and as a reliable storehold
of
wealth. As the euro establishes its durability and comes into
wider
usage, the dollar will no longer be the only option. At that
point, it
will be easier for Europe or others to exercise their financial
leverage
against the United States without damaging themselves or the
global
financial system as a whole. Europe is not quite there yet,
but the euro
is rising and so is European anger. The Saudis' financial withdrawals
this summer may be a hint of what Americans can expect -- episodes
of
veiled pressure until Washington gets the message.
The Bush warriors' reckless American unilateralism can only
hasten the
day when the creditors' conclude that they must assert their
leverage
over us, perhaps in order to defend peace and stability in the
world. How
will Americans react when they discover that "U-S-A" is a lot
less
muscular than they were led to believe? Assuming Americans do
not really
yearn to become latter-day Roman legions, many people may be
relieved to
learn the truth. Stripped of imperial illusions, this country
could
concentrate on building a different, more promising society
at home. But
while we can hope that the transition ahead will be gradual
and without
national humiliation, it's more plausible that America's brave
new
imperialists will plunge ahead blindly, until one day they encounter
their own intense reckoning with the bookkeepers.
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