Uncle Sam Takes Off
Published in Financial Times - Deutschland
(Germany) on 12 January 2009
by Christian Schütte (link to
original)
The American government keeps spiraling into endless debt. The United States is putting its credit rating at risk. Conditions similar to those in Japan are threatening.
The dollar bears the motto “In God We Trust,” but even the world’s atheists have been putting their trust in the dollar for decades. America’s credit rating has always been beyond doubt. Not even the financial crisis has damaged its special status.
At least not until now. The record sums currently being thrown into battle against the economic crisis are greatly straining the credibility of America’s policies.
The Federal Reserve is, at least theoretically, always prepared to redeem the massive number of dollars it has in circulation, but the gigantic deficits Uncle Sam is currently piling up will come to weigh heavily on the nation in the future when the crisis ends.
Nobody knows for certain at which point international creditors will reach that threshold of pain where they begin to revise their evaluation of the greenback. It is clear, however, that such a threshold does exist for the world’s greatest economic power. It’s also clear that the U.S.A. is rapidly approaching that threshold with great speed.
Of course, one shouldn’t get unduly upset when a big economy juggles deficit figures containing uncountable zeros. The GDP in the United States is still around $15 trillion and that’s a significant amount of money.
Historical Records
The extent of America’s current deficits, however, is unparalleled in peacetime. A comparison: as Germany currently gets worked up about an economic stimulus package of just two percent and a deficit of possibly three percent of GDP, the budget deficit for 2009 in the United States is expected to be at least eight percent. Meanwhile, further boosts to the economy are already being prepared in Washington. Deficits of 10 percent of GDP and more are being considered. No one talks any longer of a swift economic rebound and a return to normal financial conditions any time soon.
The argument in favor of these new debts is impressive: they are meant to prevent a depression, a tumble into a deep hole that the economy might not be able to climb out of for many years. Deflecting extreme pain in the short run will come at the cost of increased debt in future years.
The fact that this rescue attempt may be justified, however, is no guarantee that it will also work. And it by no means changes the fact that it will come with a huge price tag.
The limits of economic stimulation are readily apparent: America’s economy is currently having not only a demand problem, but it also faces inevitable structural collapse. The financial and real estate sectors, seen as the jobs-and-money engines of the now deflated boom, will suffer drastic downsizing. That also goes for the decaying automobile industry in Detroit. Hundreds of thousands of good paying – and often overpaid – jobs will disappear for the foreseeable future.
Long overdue investments in the infrastructure and subsidies for “green” jobs are intended to create an offset, but it’s apparent that a good deal of the money being handed out will seep away into economically highly questionable projects of dubitable economic value to the economy. When budgets of completely new dimension are cobbled together and put into action as quickly as possible, it’s certain to result in massive waste.
The tab for everything will have to be picked up by taxpayers and that’s bad news for long-term economic growth potential in the United States.
Americans may take cold comfort presently from the fact that their government can get almost exceptional borrowing terms. Investors all over the world are avoiding risk and U.S. securities are a recognized safe haven.
Even zero percent returns aren’t frightening financial managers off; “near-Japanese conditions” are looming. During the deflationary long-term crisis of the 1990’s, Japan also lowered the interest rate on government securities to near zero levels while simultaneously government deficits skyrocketed to fearful heights.
What’s China Doing?
Japan’s national deficit will be completely covered by Japanese personal savings. The savings surplus was and remains so large that even large exports of capital can be financed. These savings are reflected in Japan’s balance of payments as a large surplus. The same, by the way, is also true of Germany.
The United States, on the other hand, is forced to find financing for their gigantic budget deficits predominantly in foreign countries, thus turning any unrestrained fiscal expansion into a risky gamble.
For years, America’s biggest creditor has been the People’s Republic of China. The Chinese have probably already invested well over one trillion dollars in U.S. securities and government guaranteed loans to Fannie Mae and Freddie Mac. By some estimates, the Chinese continue to invest over $100 million an hour in the U.S., not least to ensure their export economy maintains an advantageous currency exchange rate.
A collapse of the dollar would also be a grave problem for China because it would devalue their immense dollar reserves thus weakening Chinese exporters’ competitiveness. Despite that, signs are becoming visible that the time of blindly acquiring dollars and U.S. securities is coming to an end.
“China Losing Taste for Debt from U.S.” reported the New York Times a few days ago. Even if this headline lacks any specific backup, the United States is nonetheless threatened if this scenario ever becomes reality.
The dollar bears the motto “In God We Trust,” but even the world’s atheists have been putting their trust in the dollar for decades. America’s credit rating has always been beyond doubt. Not even the financial crisis has damaged its special status.
At least not until now. The record sums currently being thrown into battle against the economic crisis are greatly straining the credibility of America’s policies.
The Federal Reserve is, at least theoretically, always prepared to redeem the massive number of dollars it has in circulation, but the gigantic deficits Uncle Sam is currently piling up will come to weigh heavily on the nation in the future when the crisis ends.
Nobody knows for certain at which point international creditors will reach that threshold of pain where they begin to revise their evaluation of the greenback. It is clear, however, that such a threshold does exist for the world’s greatest economic power. It’s also clear that the U.S.A. is rapidly approaching that threshold with great speed.
Of course, one shouldn’t get unduly upset when a big economy juggles deficit figures containing uncountable zeros. The GDP in the United States is still around $15 trillion and that’s a significant amount of money.
Historical Records
The extent of America’s current deficits, however, is unparalleled in peacetime. A comparison: as Germany currently gets worked up about an economic stimulus package of just two percent and a deficit of possibly three percent of GDP, the budget deficit for 2009 in the United States is expected to be at least eight percent. Meanwhile, further boosts to the economy are already being prepared in Washington. Deficits of 10 percent of GDP and more are being considered. No one talks any longer of a swift economic rebound and a return to normal financial conditions any time soon.
The argument in favor of these new debts is impressive: they are meant to prevent a depression, a tumble into a deep hole that the economy might not be able to climb out of for many years. Deflecting extreme pain in the short run will come at the cost of increased debt in future years.
The fact that this rescue attempt may be justified, however, is no guarantee that it will also work. And it by no means changes the fact that it will come with a huge price tag.
The limits of economic stimulation are readily apparent: America’s economy is currently having not only a demand problem, but it also faces inevitable structural collapse. The financial and real estate sectors, seen as the jobs-and-money engines of the now deflated boom, will suffer drastic downsizing. That also goes for the decaying automobile industry in Detroit. Hundreds of thousands of good paying – and often overpaid – jobs will disappear for the foreseeable future.
Long overdue investments in the infrastructure and subsidies for “green” jobs are intended to create an offset, but it’s apparent that a good deal of the money being handed out will seep away into economically highly questionable projects of dubitable economic value to the economy. When budgets of completely new dimension are cobbled together and put into action as quickly as possible, it’s certain to result in massive waste.
The tab for everything will have to be picked up by taxpayers and that’s bad news for long-term economic growth potential in the United States.
Americans may take cold comfort presently from the fact that their government can get almost exceptional borrowing terms. Investors all over the world are avoiding risk and U.S. securities are a recognized safe haven.
Even zero percent returns aren’t frightening financial managers off; “near-Japanese conditions” are looming. During the deflationary long-term crisis of the 1990’s, Japan also lowered the interest rate on government securities to near zero levels while simultaneously government deficits skyrocketed to fearful heights.
What’s China Doing?
Japan’s national deficit will be completely covered by Japanese personal savings. The savings surplus was and remains so large that even large exports of capital can be financed. These savings are reflected in Japan’s balance of payments as a large surplus. The same, by the way, is also true of Germany.
The United States, on the other hand, is forced to find financing for their gigantic budget deficits predominantly in foreign countries, thus turning any unrestrained fiscal expansion into a risky gamble.
For years, America’s biggest creditor has been the People’s Republic of China. The Chinese have probably already invested well over one trillion dollars in U.S. securities and government guaranteed loans to Fannie Mae and Freddie Mac. By some estimates, the Chinese continue to invest over $100 million an hour in the U.S., not least to ensure their export economy maintains an advantageous currency exchange rate.
A collapse of the dollar would also be a grave problem for China because it would devalue their immense dollar reserves thus weakening Chinese exporters’ competitiveness. Despite that, signs are becoming visible that the time of blindly acquiring dollars and U.S. securities is coming to an end.
“China Losing Taste for Debt from U.S.” reported the New York Times a few days ago. Even if this headline lacks any specific backup, the United States is nonetheless threatened if this scenario ever becomes reality.
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