ONE of the curious features of US hegemony is that it depends on the apparently limitless willingness of US allies - and even of some future competitors, such as China - to finance the apparently limit less budget and trade deficits of the US. Over the past 20 years the US has become the world’s leading debtor, its net foreign debt rising from $250bn in 1982 to $2.2 trillion in 2001, 23% of GDP - almost equal to the $2.5 trillion owed by five billion people in the whole of the developing world.
Thanks to President George Bush’s $600bn budget deficit (although he actually inherited a surplus from Bill Clinton), a persistent trade deficit with Asia and near zero savings rates, US net debt is growing, requiring daily inflows of billions of foreign-sourced dollars to cover the difference. These public and private flows are invested in sovereign debt instruments or the equity markets. As the US Federal Reserve noted in its latest quarterly report, foreigners now own 38% of US Treasury securities, more than twice the amount a decade ago.
This means that the US has mobilised an ever-greater share of world savings to finance US consumption, economic growth, living standards and military expansion. Most of those savings are from East Asia. Japan, China, the newly-industrialised countries and middle-income countries, such as Thailand, have accumulated vast resources that are not locally consumed or used for productive purposes but invested in dollar paper assets. Flows into these assets keep US interest rates low and boost the value of the dollar, allowing the US to import cheaply from the rest of the world. East Asia finances US debt in return for continued unrestricted access to the US market. This arrangement suits Asian exporters but inhibits the use of resources in other ways.
The mutual dependency was built up during the cold war and is underpinned by the strategic bonds between the US and its main Asian allies. Despite intensified regional integration, the developed and developing countries of East Asia still depend heavily on the US market to maintain their export, hence their growth momentum. Despite talk by nationalist politicians of withdrawing from dollar assets, Japan and the other East Asian allies of the US have never really challenged the arrangement.
But there have been some signs of change: over the past two years East Asian central banks have partly divested from dollars and diversified their foreign currency holdings, investing more heavily in the euro. This has raised a few eyebrows in the US but the trend is not yet a structural shift in East Asian investment, much less a reversal of flows. China, which was never a part of the US cold-war regional security system, is also dependent on the US market to fuel economic growth: it accounts for about 21% of China’s exports. China, which is in the middle-phase of an economic transition, has a vested interest in keeping the US market open and in maintaining stable political relations with Washington.
How long can this situation last? As the New Economics Foundation pointed out in its Real World Economic Outlook in September, in the longer run Asia will divest itself of some dollars and the US will have to pay increasingly punitive premiums to attract foreign investment (1). Investors will want higher returns to cover the rising risk of dollar depreciation. Higher interest rates will curb US economic activity and have deflationary global repercussions by increasing the debt service load of developing countries. As domestic consumption rises in East Asia, savings will decline, reducing the available reserves to service US debt.
Stephen Roach, the chief economist of Morgan Stanley, argues that empires are not built on debt and that the explosion of the US asset bubble in the late 1990s revealed the unsustainability of the US position: "This saga is not about the bubble. It is about the unwinding of a more profound asym metry in the global economy, the rebalancing of a US-centric world . . . History tells us that such asymmetries are not sustainable.
“Can a savings-short US economy continue to finance an ever-widening expansion of its military superiority? My answer is a resounding no. The confluence of history, geopolitics, and economics leaves me more convinced than ever that a US-centric world is on an unsustainable path” (2).