Niall Ferguson asks an interesting question: can a global hyperpower also be a global hyperdebtor? Looking at the scale of US obligations in the reconstruction of war-torn Iraq, and musing over the extent of US indebtedness due to the continuing current account deficit, he tries to reflect on just how long the de-facto paymasters - the Europeans and the Asians - will accept the role of political underdogs. On the way to doing this he cites Kenneth Rogoff (chief economist at the IMF) as saying that he would be "pretty concerned" about "a developing country that had gaping current account deficits year after year, as far as the eye can see, of 5 percent or more, with budget ink spinning from black into red." Or Balzac to the effect that if a debtor is big enough then this in fact gives power over creditors; the fatal thing is to be a small debtor. (Actually recent situations involving Russia and the IMF probably owe more to the "Balzac effect" than does the current US one, however it is interesting to note that too many creditors are in too deep with the US to idly sit back and allow anything 'really bad' to happen to the US economy, not without a fight at least.). While I suspect Ferguson is far too optimistic on the current European and Japanese positions, he does seem to deftly put his finger on some pretty delicate topics.
Can a global hyperpower also be a global hyperdebtor? Debates about the cost of occupying Iraq and reconstructing its burnt-out economy tend to duck this question. It is as if such costs were simply an item on the federal government's military budget. In reality, direct government spending on aid and reconstruction is unlikely to amount to much. Having won the war on a shoestring ($79 billion is less than 1 percent of the annual output of the American economy), the Bush administration apparently hopes that the reconstruction of Iraq will soon be paying for itself. A trifling $2.4 billion has been allocated to the postwar Office for Reconstruction and Humanitarian Assistance. Yet history strongly suggests that Iraq's reconstruction will require a kick-start of substantial foreign capital, particularly to modernize the antiquated oil industry.
Can the United States provide the necessary cash, even in the form of private-sector money? The answer is yes — so long as foreign countries are willing to lend it to the United States. For the fact is that America is not only the world's biggest economy. It is also the world's biggest borrower. Its muscular military power is underwritten by foreign capital.This is an unusual circumstance. In the prime of the European empires, when the British ran much of the Middle East, the dominant power was supposed to be a creditor, not a debtor, investing large chunks of its own savings in the economic development of its colonies. Hegemony also meant hegemoney. Britain, the world's banker before 1914, never had to worry about a run on the pound during its imperial heyday.
But today, as America overthrows "rogue regimes," first in Afghanistan and now in Iraq, it is the world's biggest debtor. This could make for a fragile Pax Americana if foreign investors decide to reduce their stakes in the American economy, possibly trading their dollars for the increasingly vigorous euro. Foreign investors now have claims on the United States amounting to about $8 trillion of its financial assets. That's the result of the ever-larger American balance-of-payments deficits — totaling nearly $3 trillion — since 1982. Last year, the balance-of-payments deficit, the gap between the amount of money that flows into the country and the amount that flows out, was about 5 percent of gross national product. This year it may be larger still. The Wall Street Journal recently asked: "Is the U.S. Hooked on Foreign Capital?" The answer is yes, and this applies to the government even more than the private sector. Foreign investors now hold about two-fifths of the federal debt in private hands — double the proportion they held 10 years ago, according to the Treasury Department.
Serving as an engine of global growth, aspiring to be a liberal empire and yet acting like an emerging market: it's quite a combination. Is it sustainable? ...............When the last great English-speaking empire bestrode the globe a hundred years ago, capital export was a foundation of its power. From 1870 to 1914, net capital flows out of London averaged from 4 to 5 percent of gross domestic product. On the eve of World War I, the capital flows reached an astonishing 9 percent. This was not only an extraordinary diversion of British savings overseas. It was also a remarkable attempt to transform the global economy by investing in commercial infrastructure — docks, railways and telegraph lines — in what we now call less developed countries.
From 1865 to 1914, nearly as large a proportion of total British savings went to Africa, Asia and Latin America as remained in Britain. Critics of colonialism may carp about the wickedness of empire, but the one undeniable benefit of British hegemony was that it encouraged investors to risk their money in poor countries. It also gave the British real leverage over the rest of the world. British rule in Egypt did not begin with military occupation in 1882. For years before, British investors had been building up their holdings of Egyptian assets (most famously the Suez Canal). This could prove a crucial difference between the days when Britain wielded power in the Middle East and today, when the United States aspires to recast the region. First, little in the current geographical distribution of American overseas investment suggests a natural predisposition to sink dollars into the desert. More than half of all American foreign direct investment is in Europe, compared with a paltry 1 percent in the Middle East. SECOND, there can be no guarantee that foreign investors will be willing indefinitely to put such a large chunk of their savings in American government bonds and other low-risk securities. Right now they seem to be content with the prospect of a third year of disappointing returns on Wall Street and the lowest yields in Treasury bonds since 1962. But will they stay content? Not so long ago, from 1984 to 1987, dollars were being dumped on the currency markets. Another crisis of confidence is not impossible to imagine, especially if all those foreign holders of bonds worry about the Bush administration's combination of increased military spending and decreased taxation.
Source: New York Times
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