End of the credit line?

America could be in for a nasty shock if foreign investors decide to stop bankrolling its massive trade deficit, writes William Keegan

The Guardian
September 9, 2003
By William Keegan

A hegemonic economy can do what it likes - or can it? The widespread assumption in the financial markets until recently was that the Bush administration can go on piling up record trade deficits and there is not much the rest of the world can do about it.

Indeed, what the rest of the world does, especially the east Asian part of it, is to recycle hundreds of billions of dollars straight back to New York, in the form of purchases of bonds and Treasury bills.

This arrangement, we are told, produces bliss all round. The US consumer carries on consuming more than he or she produces; the US government carries on borrowing as if there were no tomorrow; and countries such as Japan and China do not have to revalue their currencies, thereby retaining the international competitiveness that sustains the remarkable Chinese growth rate and Japan's slow recovery from recession.

Such is the putative convenience of this process that some commentators have even begun to suggest that Treasury secretary John Snow's recent trip to east Asia - when he did not have much success in persuading governments to revalue their currencies - was just a charade to please those in the US heartlands who are worried about losing jobs to the supercompetitive east.

I wonder. It seems to this distant observer - but regular visitor to the US - that the jobless recovery is a big issue over there. However much the consumer benefits from cheap Asian imports, in the end citizens and voters want jobs, and they hold the government responsible. Hence the famous Clinton remark, now an almost unbearable cliché: "It's the economy, stupid." In this context, one of the paradoxes of the phenomenon known as globalisation is the way US multinationals own many of the companies which manufacture in, and export from, mainland China, thereby profiting - literally - from low-cost labour and an extremely competitive exchange rate.

But how long can the willing recycling of trade surpluses continue? The limits of economic hegemony seem to have occurred to the US administration as it contemplates a $4bn (£2.5bn) monthly bill for military operations in Iraq and estimates that rebuilding Iraq next year could cost $75bn. Suddenly, having gone to war against the wishes of continental Europe, Washington wants the "cheese-eating surrender monkeys" and others to share the bill.

At the same time the combination of escalating US budget deficits and a falling bond market has aroused fears in financial circles about US dependence on foreign funds. As for the Asian investors themselves, there were suggestions in yesterday's Financial Times that flows may not be so generous in the future.

There are precedents for the denting of assumptions that the hegemonic economic power can go on blissfully borrowing indefinitely. Britain in the heyday of empire, and during its long decline from hegemony, found that its economy could be vulnerable to sudden withdrawals of funds that were deposited in London.

In 1979 the US economy itself was hit by a crisis of confidence, which involved a slowdown and withdrawal of foreign inflows. These are early days, and recent reports may prove to be alarmist. But the Bush administration, whose economic policy is obviously dominated by electoral considerations, could get nasty shock if foreign investors began to demand a significantly higher price for their funds.

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Nieuwe Oorlog 2003 | Ander Nieuws week 38