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Risky
Business: U.S. Borrowing And Foreign Lending
by
Seth Sandronsky
September
13, 2003
The
American public may not know it, but the U.S. economy would be up a steep creek
without foreign lenders. They help to
fund the federal government’s deficit spending, projected to reach $475
billion, or 4.3 percent of economic output, next year.
Foreign
investors buy Treasury bonds to allow the federal government to spend more than
it collects in taxes, which President Bush and Congress have cut three times in
three years. The sharp increase in war
spending for the Iraq occupation has also increased the red ink.
Against
that backdrop, Treasury Secretary John Snow recently traveled to Asia, where he
did not persuade China’s leaders to change the dollar-peg of the Chinese
currency, the renminbi. A more
expensive renminbi would boost the price of Chinese exports, and make U.S.
exports lower-priced by comparison.
Snow
in Asia was partly a ploy to publicly address the rising tide of unemployment
in the American manufacturing sector.
It
has been in a job-loss mode since Bush arrived in Washington.
Some
44,000 U.S. factory workers lost their jobs in August, according to data from
the Labor Dept. The national economy
dropped a total of 93,000 jobs last month.
Moreover,
workers who remain employed are being squeezed to produce more.
The
productivity of American workers rose at a 6.8 percent annual rate during the
second quarter of 2003, the biggest jump in 15 months.
Finding
paid work is not getting easier. U.S. employers cut 170,000 jobs in the
April-to-June period.
That
is why Bush wants workers who vote to see him as taking bold action to reverse
the nation’s shrinking payrolls, especially in the industrial heartland. Cheap Chinese exports are easy to blame for
America’s job-loss economy.
Case
in point is the president’s remarks on Labor Day that U.S. firms producing in
America are hurting. He urged more
market fairness for American manufacturers, but was mum on U.S. firms producing
in China and exporting to America.
As
Snow and Bush learned, Chinese leadership has no reason to remove the
renminbi’s dollar-peg. That would raise
the price of China’s exports, slow growth and increase unemployment.
Moreover,
such a currency appreciation would also cut China’s trade surplus with the
U.S. With that surplus, China’s central
bank invests in U.S. government bonds.
Apparently,
Bush wants China to reduce its export earnings. But such a policy is creating the financial conditions to slash
overseas investment flows to the U.S.
Foreign
ownership of Treasury debt has risen from one-fifth in 1995 to one-third today,
the Financial Times of Sept. 8 reported, citing Merrill Lynch as a source. This is part of the backdrop to the sell-off
in the U.S. bond market that began in mid-June.
A
front-page article in the same edition of the FT looked at the chance that
Asian investors might lose their enthusiasm for lending to the U.S.
Indications
of this shift could include “recent sharp falls in the price of US government
debt.”
Surely
the rising federal deficit is making overseas investors queasy.
Also
making them nervous is the U.S. trade deficit that requires annual borrowing of
nearly $550 billion, or $1.5 billion each day.
The
security of the dollar, the world’s main currency, flows from the power of
America’s armed forces. But all the
military strength in the world cannot hide the fact from foreign lenders that
the U.S. is piling up public and private debt at a fever pitch.
“At
the current rate of borrowing, the net indebtedness of the United States will
exceed the value of the stock market by 2018 and the combined value of the
stock market and housing stock by 2032,” economist Dean Baker recently wrote.
How
much longer can the American economy keep going deeper into debt that is
financed by foreigners? The answer to
the question may arrive sooner than later.
One
thing is certain. We have not heard the
last word from the emerging “crisis of confidence” concerning foreign creditors
and American debtors.
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