[nasional_list] [ppiindia] The dollar
- From: "Ambon" <sea@xxxxxxxxxx>
- To: <"Undisclosed-Recipient:;"@freelists.org>
- Date: Sat, 19 Feb 2005 01:34:31 +0100
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U.S. hegemony has a strong foundation
David H. Levey and Stuart S. Brown International Herald Tribune
Saturday, February 19, 2005
The dollar
NEW YORK Would-be Cassandras have found a new threat to U.S. hegemony:
overdependence on foreign capital and growing foreign debt.
.
The U.S. economy, according to doubters, rests on an unsustainable accumulation
of foreign debt. The current account deficit - the difference between what U.S.
residents spend abroad and what they earn abroad in a year - now stands at
almost 6 percent of gross domestic product; total net foreign liabilities are
approaching a quarter of GDP. Sudden unwillingness by investors abroad to
continue adding to their dollar assets, in this scenario, would set off a
panic, causing the dollar to tank, interest rates to skyrocket, and the U.S.
economy to descend into crisis, dragging the rest of the world down with it.
.
Despite the pervasiveness of this doomsday prophecy, U.S. hegemony is solidly
grounded: It rests on an economy that is continually extending its
technological lead, ensuring its continued appeal for foreign investors. The
dollar's role as the global monetary standard is not threatened, and the risk
to U.S. financial stability posed by large foreign liabilities has been
exaggerated. If anything, the world's appetite for U.S. assets bolsters U.S.
predominance rather than undermines it.
.
The statistic at the center of the foreign-debt debate is net international
investment position, the value of foreign assets owned by U.S. residents minus
the value of U.S. assets owned by nonresidents. Since 1980, the NIIP has
plummeted from 13 percent to 24 percent of GDP, or $2.6 trillion. But to get a
sense of the risk this figure actually poses, you have to look at the NIIP's
two components: direct investment and financial liabilities (the value of
stocks, bonds and bank deposits held overseas).
.
Removing direct investment from the equation leaves $5.1 trillion in U.S.-held
foreign financial assets versus $8.1 trillion in U.S. financial assets held by
foreign investors. This last figure represents 74 percent of U.S. GDP - a
statistic that would seem to give cause for alarm. Considering foreign
ownership of U.S. financial assets as a percentage of GDP, however, is less
enlightening than comparing it to the total stock of U.S. assets: $33.4
trillion, more than four times the value of what is held abroad.
.
While the NIIP will continue to grow for many years to come, future dollar
depreciation and market adjustments in interest rates and asset prices will
mean that its increase will be far less dramatic than many fear. Moreover,
focusing exclusively on the NIIP obscures the United States' institutional,
technological and demographic advantages. The classic doomsayer argument - that
growing foreign indebtedness results from too little savings by Americans -
neglects the fact that savings and investment are seriously undervalued in U.S.
economic accounts. When you include capital gains, 401(k) retirement plans, and
home values, U.S. domestic saving is around 20 percent of GDP, the same as in
most other developed economies. And when you consider "intangible" investment
(like new-product development and design experimentation) as part of total, the
supposed increase in consumer spending as a share of GDP turns out to be a
statistical artifact.
.
Indeed, much of the explanation for chronic current account deficits relates to
the U.S. economy's strong fundamentals, not fatal structural flaws. Thanks to
strong economic growth reinforced by a bias toward imports and a still
overvalued currency, American consumers have tended to spend a disproportionate
share of their incomes on imports. More important, with the United States
expected to grow faster than Europe and Japan over the next decades and wealth
growing rapidly in Asia, foreign private investors and central banks will
continue to flock to U.S. financial markets. Asian governments must continue to
finance U.S. imports of their manufactured goods, since the United States is
their largest market and a major source of inward direct investment. And the
spread of information technology to new sectors of the U.S. economy will make a
revival of U.S.-bound private capital flows likely as well.
.
To be sure, the economy will at some point have to adjust to a decline in the
dollar and a rise in interest rates. But these trends will at worst slow the
growth of U.S. consumers' standard of living, not undermine the U.S. role as
global pacesetter. The dollar will remain dominant in global trade, payments
and capital flows, based as it is in a country with safe, well-regulated
financial markets. For foreign central banks, U.S. Treasury bonds,
government-supported agency bonds and deposits in highly rated banks will
remain, for the foreseeable future, the chief sources of liquid reserve assets.
And provided U.S. firms maintain their entrepreneurial edge - and despite much
anxiety, there is little reason to expect otherwise - global asset managers
will continue to want to hold portfolios rich in U.S. corporate stocks and
bonds.
.
The real threat to U.S. hegemony, then, is not that the sentiments of foreign
investors will make foreign debt unsustainable; it is that protectionism and
isolationism at home will put an end to the dynamism, openness and flexibility
that power the U.S. economy.
.
(David H. Levey was formerly managing director of Moody's Sovereign Ratings
Service. Stuart S. Brown is a professor of economics and international
relations at Syracuse University.)
.
See more of the world that matters - click here for home delivery of the
International Herald Tribune.
.
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