A rchive Date
[ 04-02-2005 ]
Category
[ International Relations ]
sub-Categoy
[ U.S ]
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[http://www.canoe.ca/NewsStand/Columnists/Ottawa/Michael_Harris/2005/02/03/919664.html
Too much red with white and blue
By MICHAEL HARRIS -- For the Ottawa Sun
Fri, February 4, 2005
According to the old saw, there is nothing as nervous as a million dollars.
Inflation makes that number look almost quaint these days. But the insight, with the addition of a few zeros, remains sound. People with money are always worried about it. So when two of the richest Americans in the world start selling their U.S. dollars, it should get at least as much attention as the Super Bowl.
Warren Buffet and Bill Gates don't like what they see on the economic horizon. How could they? The world's "richest" country, their country, is awash in unprecedented debt. Back in the 1980s, President Reagan was aghast when the U.S. debt stood at one trillion dollars. Today, that number is $7.5 trillion.
Ancient history
One trillion of that debt is ancient history from before the Reagan years. But the other $6.5 trillion has built up in just 30 years. Two trillion has been amassed in the last eight years, and a stunning one trillion in the past 24 months. If you add up all the debt in the U.S., from governments, corporations, financial institutions and consumer credit, the number is $37 trillion, or nearly four times the gross domestic product of the country. Fortune magazine puts the total even higher, $51 trillion, or five times the GDP.
Here's another scary number. America's current account deficit is $665 billion. For governments to run current account deficits is like you or me borrowing at the bank to pay for our groceries. The U.S. government has to borrow to service its current account deficit and mountain of debt. Who do they tap?
Certainly not Americans. The U.S. net national savings rate is a measure of how much money the country has socked away for a rainy day. It is expressed as the combined savings of private households, businesses and government as a percentage of national income.
Today it stands at 2% and was recently as low as .4%. In other words, there are precious few savings of any kind in the U.S. and virtually no household savings. Growth is being driven by ever more sanguine borrowing and escalating debt.
So the American government has looked elsewhere to finance the risky business of living beyond its means. In fact, the country's biggest creditors are now foreign governments. The giant economies of Asia, including China, Japan, and India, now hold $2.2 trillion of America's debt in the form of U.S. dollars. According to Stephen Roach, the chief economist at Morgan Stanley, the U.S. is "sucking up" 80% of the world's surplus savings to finance its debt. And just how much is that? A cool $2.6 billion every business day. America borrows to spend, Asia and Europe lend and produce.
But what would happen if America's creditors decided to reduce their lending? For one thing, the credit-driven consumer merry-go-round in the U.S. would lurch to a halt and the illusion of prosperity would disappear unless someone else could be found to invest in the mammoth debt servicing charges. If none could be found, the U.S, stock market could suffer the same kind of meltdown that struck in Japan.
Up until now, it was considered unthinkable that any creditor would ever call in Uncle Sam's IOU. Foreign creditors have always relied on the American market as the engine to drive their own industrial output. So if they crashed the U.S. economy by withholding investment capital, their own nations would be racked with enormous problems, principally chaotic unemployment.
It sounds like a good argument for the status quo, but the evidence is already mounting that America's biggest creditors have begun to move away from their investment in U.S. dollars. China, for example, held 50% of its foreign reserves in U.S. dollars as recently as 2001. But last year, when China's reserves grew by $112 billion, only 25% of that was held in U.S. dollars.
The new buzz word is "diversification," which could easily turn out to be a slow retreat from the once mighty U.S. dollar in favor of other currencies like the euro. Canada is following suit.. As of Dec. 31, 2000, the Bank of Canada held $21.7 billion of our foreign currency reserve in U.S. dollars, or 75% of the total. As of Jan. 31, we have more than $30 billion in liquid assets. But at $15 billion of that total, the U.S. dollar represents only 50% of the total.
The perfect storm brewing for the U.S. dollar also includes oil and the old bear, Russia. In modern times, the U.S. has always relied on cheap energy to sustain the American lifestyle. Today oil, at $50-plus a barrel, is anything but cheap. But will it go even higher?
While the Bush administration is treating today's prices as an aberration that can be corrected by the appropriate foreign policy successes, something new has been added to the equation. Asia's huge and aggressively expanding economies are now competing with the U.S. for energy resources. That could mean permanently high oil prices at a time when there are virtually no hydrocarbon surpluses left on the planet for any country to stockpile.
International currency
And what on earth would happen if the rest of the world dropped the U.S. dollar as the currency of petro-transactions? Russia is already talking about invoicing Europe in petro-euros for its oil imports from the former Soviet Union. If other oil producing nations follow suit, and they are talking about it, the dollar could collapse as the accepted international currency.
If the retreat from the U.S. dollar became "disorderly", the American economy could be turned into a wasteland of high interest rates and tight investment capital and even more massive trade deficits. In those circumstances, Vice-President Dick Cheney's blithe pronouncement that "deficits don't matter" might not sound quite so plucky.
Is anybody getting nervous?
Author, broadcaster and investigative journalist Michael Harris can be heard Monday to Thursday, 1-3 p.m. on 580 CFRA.
Letters to the editor should be sent to oped@ott.sunpub.com. Home Page
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