April 20, 2003
WHO'S GONNA COLLECT?:
The True Cost of Hegemony: Huge Debt (NIALL FERGUSON, April 20, 2003, NY Times)Some economists argue that th[e] transformation from creditor to debtor is nothing to worry about. Capital flows into the United States, they say, simply because it is a great place to invest and foreigners want a piece of the action. In any case, the foreign investors seem ready to settle for markedly lower returns when they invest in the United States than the returns Americans get when they invest overseas. That is the only way to explain why the United States consistently receives higher investment income from its investments abroad than it pays out to foreigners who have put their money into American assets.This might lead to the conclusion that Mr. Rogoff of the I.M.F. has little to worry about. But while being a hyperdebtor may not matter in economics, it can matter in the realm of strategy.
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. [...]
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.
Since the creation of the euro, investors have a whole new range of securities in which to invest. European bonds might look attractive if foreigners, and not just Americanophobic French millionaires, start to think of the euro as safer than the dollar. Al Jazeera recently ran a cartoon of Uncle Sam weeping as the euro was run up a flagpole in place of the once-mighty dollar. [...]
Balzac once said that if a debtor was big enough then he had power over his creditors; the fatal thing was to be a small debtor. It seems that Mr. Bush and his men have taken this lesson to heart.
Even after reading James MacDonald's terrific recent book on national debt, I'm not at all clear on these issues. But a few things do seem clear:
Posted by Orrin Judd at April 20, 2003 9:13 AM
Remarks on your four assertions:
1) If you include liabilities not counted in federal debt -- notably commitments for Social Security and Medicare -- then our debt is far higher now than it was in 1946, closer to 350% of GDP. Of course, most of this is "owed to ourselves," and due well in the future, so we have no immediate threat of default.
2) Right on - Europe's debt situation is far worse than ours.
3) Also right - there's no economic reason to say that what Britain did is superior to what we're doing.
4) Well, but if we don't default, but the risk of default goes up, then we pay more in interest and are poorer. So we want to make foreigners believe that we would never, ever consider defaulting on our debate.
pj:
Commitments? They were made to be broken.
Kennedy has his thesis, and he's sticking to it (facts be damned). The true definition of an ideologue who poses as a scholar....
Posted by: Kevin Whited at April 20, 2003 4:47 PMYou begin by telling us how you do not really understand the big issues
involved with being in debt or credit as a nation, and I would have to stand
with on that to a degree. It's hard to predict the way things go in economics,
especially now that we're so connected globally. I believe there has to be some
form of discipline, at some point, in case the 'invisible hand' produces very
visible shocks. Mrs Thatcher, over here, once said that she realised the value
of money, debt and credit, from watching how her father ran their grocery shop.
1) I have not seen a mention of "crisis or decline", so there's no need for
straw men or predictions of doom. The US does appear to have a large level of
consumer debt however - potentially troublesome. Something someone needs to be
aware of anyway.
3) British investment overseas resulted in profit, funnily enough. Not all made
in "Burmese railway lines" but also railways (and much else) in "less developed
countries" like Argentina. Oh, and the USA, amongst others. There's no need to
sneer at this. But if you want be a 'dependency culture' of the Japanese, go
ahead. I'm sure you'll live a high life until their banking system collapses
and their money disappears. I guess Saudi Arabia could help out then, until the
oil runs out. Maybe Iraq too?
4) What would happen if you "repudiated the debt"? Bad things I think. No one
would trust you again for a long time for one, after all, it's theft. A lot of
people would pay dearly, in your country and globally, if the financial system
is discredited. Mind you, you would cheer a sizeable portion of humanity
desirous of the death of capitalism. Hardly a 'conservative' platform!
P.S. Are you laughing as you make some of these statements? I sometimes wonder
whether you're joking.
Cheers.
Alastair:
The Argentine railway system? Two hundred years of empire and that's what all that investment wrought? I'll take the inflow, not the outflow of capital, if that's the case.
Alastair, people in your country got over the
USSR's repudiation of the czarist debt easily
enough. That's not a problem.
The Japanese banking system collapsed over
10 years ago. Although it slowed the growth
of the Japanese economy, it does not seem
to have had any other effects on the global
economy.
Orrin, what England got out of her overseas
investments was survival. She sold them off
to pay for the war against Hitler and would
not have been around on Dec. 1, 1941, had
she not had those credits.
Harry:
How was Hitler going to get there?
Without her purchases of food and material -- all cash until Lend-Lease started -- England wouldn't have had
the wherewithal to win the Battlw of Britain. She nearly didn't anyway.
Logistics, logistics, logistics.