Diet for the Dollar
Recently, Standard & Poor’s lowered its outlook for America’s credit rating from “stable” to “negative” because of the fact that the biggest economy in the world has reached 100 percent in public debt and the federal budget deficit is now almost 11 percent of gross domestic product.
World economy markets responded with falling stock quotations, a depreciation of the dollar and a sudden price jump for gold and other “protective” assets. Does it necessarily mean that predictions of those who talk about the U.S. default and dollar crash are starting to come true? I’m sure it does not.
First of all, practice shows that the danger to financial stability arises not from the actual value of debt or deficit but from the internal weaknesses and inadequacies of the economy. Stability itself strongly depends on the country’s role in the world economy and the nature of government borrowing.
Take, for example, Japan. In the mid 1990s, Japan’s debt was 58.2 percent of GDP, though its credit was rated very highly by all major rating agencies. Japan’s central bank rate stood at six percent per annum and the national currency rate amounted to 153.8 yen per dollar. During the last 20 years, it has been a difficult time for the country. Towards the end of last year, Japan’s national debt reached 225.8 percent of GDP, the budget deficit was 9.1 percent of GDP and its credit ratings were at very low levels among developed countries. What else? The central bank rate now is at 0.3 percent and the yen has stabilized at 81.8 yen per dollar. The situation in the United Kingdom, for instance, also does not look so optimistic: the budget deficit is nine percent of GDP, the interest rate remains at 0.5 percent and the pound’s value is not the lowest in comparison to other currencies.
However, all these countries play an important role in the global economy, dominate critically important markets and borrow using their national currencies. All this allows them to place their treasury bonds not only in domestic but also in external markets, to successfully refinance their budget deficit. Therefore, a direct threat to America — especially when there are more “free” dollars in the world than yens or pounds — is not noticeable yet.
I would like to emphasize that for Japan, the United Kingdom or the United States, it is easier and more profitable to resort to repay and eliminate existent liabilities than to even think of defaulting on the debt.
In addition, a lack of confidence in the United States won’t be the breaking point when the world economy will crash. America needs a cheap dollar and debt alleviation. During the past several decades, the world relied on the United States as the ultimate uncompromising consumer, ready to pay for almost anything. Asia’s industrialization was largely due to America’s deindustrialization. The technological revolution was possible because of Americans’ willingness to take risks and invest in something new.
Modern financial capitalism and its “sweet” fruits, picked off by moguls from around the world, are also products of America. However, everything eventually comes to an end, and current imbalances must be corrected. The dollar should go down in price, some debt should be discounted due to inflation, the consumption of American households should become more rational and closer to European standards and foreign trade deficit should be reduced. All this will not force international investors to turn their backs on the United States; they don’t have an alternative even in the face of the growth of the BRIC countries. Today, the global economy is flooded with U.S. dollars, but its cost still remains high. At the same time, the overabundance of the dollar limits the opportunities of its investment in foreign economies. Therefore, today we are on the verge of another descending trend of America, which is not a “historically unique” situation.
It is incorrect to compare the current debt value with the U.S. liability in 1945-1947. Then it was about the gold dollar and now it is about the paper dollar; then the stock ratio was 30-40 percent of GDP, now it is 130-160 percent and then the global financial market pales in comparison with what it is today. In general, we shouldn’t rush to make extravagant conclusions: America is not threatened with a default, and a slight weakening of its financial leadership can be good for the country. The main lesson of the 20th century is that the bad players were only those countries who believed in their ideological or political exclusiveness. Economic exclusivity is worse than economic normality, and the more “normal” the United States becomes, the more normal the whole world will be.
World economy markets responded with falling stock quotations, a depreciation of the dollar and a sudden price jump for gold and other “protective” assets. Does it necessarily mean that predictions of those who talk about the U.S. default and dollar crash are starting to come true? I’m sure it does not.
First of all, practice shows that the danger to financial stability arises not from the actual value of debt or deficit but from the internal weaknesses and inadequacies of the economy. Stability itself strongly depends on the country’s role in the world economy and the nature of government borrowing.
Take, for example, Japan. In the mid 1990s, Japan’s debt was 58.2 percent of GDP, though its credit was rated very highly by all major rating agencies. Japan’s central bank rate stood at six percent per annum and the national currency rate amounted to 153.8 yen per dollar. During the last 20 years, it has been a difficult time for the country. Towards the end of last year, Japan’s national debt reached 225.8 percent of GDP, the budget deficit was 9.1 percent of GDP and its credit ratings were at very low levels among developed countries. What else? The central bank rate now is at 0.3 percent and the yen has stabilized at 81.8 yen per dollar. The situation in the United Kingdom, for instance, also does not look so optimistic: the budget deficit is nine percent of GDP, the interest rate remains at 0.5 percent and the pound’s value is not the lowest in comparison to other currencies.
However, all these countries play an important role in the global economy, dominate critically important markets and borrow using their national currencies. All this allows them to place their treasury bonds not only in domestic but also in external markets, to successfully refinance their budget deficit. Therefore, a direct threat to America — especially when there are more “free” dollars in the world than yens or pounds — is not noticeable yet.
I would like to emphasize that for Japan, the United Kingdom or the United States, it is easier and more profitable to resort to repay and eliminate existent liabilities than to even think of defaulting on the debt.
In addition, a lack of confidence in the United States won’t be the breaking point when the world economy will crash. America needs a cheap dollar and debt alleviation. During the past several decades, the world relied on the United States as the ultimate uncompromising consumer, ready to pay for almost anything. Asia’s industrialization was largely due to America’s deindustrialization. The technological revolution was possible because of Americans’ willingness to take risks and invest in something new.
Modern financial capitalism and its “sweet” fruits, picked off by moguls from around the world, are also products of America. However, everything eventually comes to an end, and current imbalances must be corrected. The dollar should go down in price, some debt should be discounted due to inflation, the consumption of American households should become more rational and closer to European standards and foreign trade deficit should be reduced. All this will not force international investors to turn their backs on the United States; they don’t have an alternative even in the face of the growth of the BRIC countries. Today, the global economy is flooded with U.S. dollars, but its cost still remains high. At the same time, the overabundance of the dollar limits the opportunities of its investment in foreign economies. Therefore, today we are on the verge of another descending trend of America, which is not a “historically unique” situation.
It is incorrect to compare the current debt value with the U.S. liability in 1945-1947. Then it was about the gold dollar and now it is about the paper dollar; then the stock ratio was 30-40 percent of GDP, now it is 130-160 percent and then the global financial market pales in comparison with what it is today. In general, we shouldn’t rush to make extravagant conclusions: America is not threatened with a default, and a slight weakening of its financial leadership can be good for the country. The main lesson of the 20th century is that the bad players were only those countries who believed in their ideological or political exclusiveness. Economic exclusivity is worse than economic normality, and the more “normal” the United States becomes, the more normal the whole world will be.
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