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.