During the past two decades, as random financial crises visited various fast-growing economies, we have become familiar, after the fact, with the profile of a developing country that’s headed for trouble. A booming, modernizing industrial system expands so robustly that it’s described as a “miracle” (Mexico, Korea, Indonesia, Brazil, to name a few). Its financial markets soar as foreign capital rushes in to invest and share in the bountiful returns. The country takes on short-term foreign debt at a disturbing pace–much faster than national income is growing–but no one pays much attention because the exuberant lending seems to confirm the bright prospects. Then, one day, investors redo the arithmetic and realize their expectations are wildly exaggerated. As they rush for the door, taking their capital, the currency collapses. Deep recession follows. The miracle is exposed as illusion.
In present circumstances, oddly enough, the country that fits this profile is the United States, where surging economic growth is also portrayed as miraculous. The United States is unlikely to experience a full-blown currency crisis like Mexico’s or Indonesia’s, since the dollar is the hard currency everyone relies upon as the anchor in global commerce. But the fundamentals are more similar than American triumphalism will acknowledge, and America’s prosperity can vanish just as swiftly if foreign investors decide to take back their money.
An abrupt exit by foreign capital would be a disaster for the United States but also for the world as a whole. That’s because the United States has used the borrowed money mainly to sustain its unique role as buyer of last resort–keeping the system afloat by mopping up the world’s excess output. As a result, surging US imports are producing record trade deficits–nearly $300 billion last year, almost triple the deficit of 1995. The authorities acknowledge that the imbalance is unsustainable and must be adjusted, but they blandly advise us not to worry. After all, America has been running persistent trade deficits–buying more than it sells in the global system, a lot more–for more than two decades, and nothing terrible seems to have happened (if one ignores millions of lost manufacturing jobs). Swollen imports from Asia and elsewhere, it is said, reflect heroic efforts by US consumers to revive economies smashed by the global financial crisis that unfolded in 1997.
America’s anachronistic role as backstop purchaser for the trading system originated in the cold war. The twin objectives of ideological triumph and commercial advance were always intertwined in US policy and mutually reinforcing at a deep level. Washington provided the capital, foreign aid and military procurement to rebuild Europe and develop Asia’s miraculous tigers; it granted easy access to the US market and even awarded shares of US production to far-flung allies. That was the glue that held the alliance together, keeping nations from “going red,” while it also extended the reach of US multinationals and investors.
“The US de-emphasized savings and encouraged consumption, even to the point of providing tax deductions for consumer credit interest expenses,” Robert Dugger of the Tudor Investment Corporation explained in testimony before the US Trade Deficit Review Commission. “This policy supported the evolving export-led growth strategies of US allies…. The United States cold war economy won because it essentially outconsumed the USSR and China.” When the cold war ended a decade ago, the ideology disappeared but the economic strategy remained in place, stripped of the patriotic fervor for liberating people and now nakedly devoted to commercial/financial objectives.
But this cannot continue. Since early 1998 the United States has provided roughly half the total demand growth in the entire world, according to the International Monetary Fund. The more ominous fact is that America’s status as a debtor nation has deteriorated rapidly during the booming prosperity of the past three years. The cumulative net obligations to foreign creditors from the many years of trade deficits reached an astonishing 18 percent of GDP by the end of 1998 and by now may be 20 percent or higher. That compares with 13 percent of GDP in 1997. Ten years before, it was zero. In short, the hole is deepening at an accelerating pace. Sooner or later, foreign investors will react with alarm.