Dick Nichols
The first article in this series, printed in GLW #671, looked at how much the bipartisan recipe of neoliberal "economic rationalism" has been responsible for Australia's 15 years of economic growth, noting its successes in making the country an attractive "investment opportunity" for overseas capital and so allowing its economy to grow faster.
How vulnerable though is the "flexible and competitive" Australian economy to any explosion of the tensions building up in the world capitalist economy? These "global imbalances" are most obviously reflected in the headlong growth of the indebtedness of the US — the world's largest national economy, which is also the world's largest debtor nation.
What created the huge US external debt is examined in this article. Further articles in this series will assess the debate over how dangerous a threat it poses and how the fallout from a severe increase in the US current account deficit (CAD) might affect the world economy and Australia within it.
In the last quarter of 2005 — for only the sixth time since 1960 — US investments abroad delivered less income to their owners than did the assets of foreign investors in the US. For the whole year, this "net income balance" was in the black by only US$1.6 billion, a fall from $30.4 billion in 2004 and not a good profit result for the world's preeminent imperialist power.
The net income balance forms part of the current account side of the overall balance of payments, whose main component is the balance on trade in goods and services. Here the US has continued to rack up enormous deficits — $723.6 billion in 2005. With other payments abroad added in, such as grants to client states like Israel and for occupied Iraq's "reconstruction", the total US CAD reached a record $804.9 billion last year — 6.4% of US gross domestic product and more than Australia's GDP.
Like any excess of national spending over national income, this CAD had to be funded, either by borrowing abroad and/or by running down official reserves of foreign exchange and gold.
In 2005, net capital inflows into the US were $801 billion ($1.293 trillion in gross foreign inflows into the US minus $492 billion in gross US investment abroad).
Foreign capital inflows
Up until the 2001 recession, private capital looking for gain in the US "new economy" boom prevailed within this inflow. Since then an increasingly important component has been the purchase by Asian central banks, particularly those of China and Japan, of US public and commercial debt to limit their countries' exchange rates from appreciating against the US dollar. This component has risen to over 40% of total inflows, $718 billion between 2002 and 2004. Financial Times analyst Martin Wolf has called this "the largest 'foreign aid' program in history".
In the balance of payments, capital inflows are registered by the capital and financial account. The overall balance of payments is equal to the current account balance plus the capital and financial account balance. It is equal to zero when the demand for and supply of foreign exchange is equated via movements in the exchange rate and/or official foreign exchange reserves.
The torrent of capital inflows to the US has led the dollar to appreciate 33.5% against the currencies of the countries with which the US most trades — its "trade-weighted index" — between the second quarter of 1995 and the first quarter of 2002. It then fell by 11.9% to the end of 2005.
Twenty-five years of CADs have converted the US from a creditor economy, with net foreign assets worth 7.2% of GDP in 1982, to a debtor economy with net foreign liabilities worth 25.1% of GDP in 2005. The US deficit now soaks up 67% of world current account surpluses. Just holding the US CAD at its current level of 6% of GDP would see US net foreign liabilities double to 50% of GDP by 2010.
Calculations of how large the US CAD will be by 2010, if policies and exchange rates remain unchanged, range between 8% and 12% of GDP. While no observer believes that this scenario will ever eventuate, the timing and impact of any eventual CAD "adjustment" is very difficult to predict.
There is no consensus among analysts. Debate about if and when the US CAD will "blow" sounds like nothing so much as seismologists discussing the location, timing and destructive potential of the next earthquake. Through their economic modelling and investigations of past experiences of CAD reversals, economic analysts have come up with a wide set of scenarios and policy recommendations. These range from "leave well alone" to "panic now". Why?
Partly, this is because of the nature of the balance of payments accounting categories themselves. These register various economic variables — income flows in and out of a national economy, the degree to which it lends savings to, or borrows them from, other economies to fund domestic investment, and the balance between total national income and expenditure. But they say nothing about how these variables interrelate in real economic life, nor about the underlying economic forces moulding them.
Has the increase in the US CAD mainly been driven from outside the US economy by the ever-increasing inflows of foreign surpluses invested in US assets (stressed by Federal Reserve chairperson Ben Bernanke in his theory of a global "savings glut" being responsible for historically low world interest rates)? Or is the root problem the widening gap within the US between the rate of investment and the overall rate of savings, slashed by a combination of President George Bush's tax cuts and the credit splurge brought on in 2001-02 by ultra-low interest rates? Or have these separate forces impacted differently at different times?
There's a rough consensus that the immediate drivers of the US external deficit are an overvalued dollar making US exports uncompetitive and imports cheap and the relatively faster rate of growth (and hence of demand for imports) in the US compared to Europe and Japan. But while US monetary policy has certainly added to the CAD, has it basically been "made in the USA"?
East Asian surpluses
Another major factor has surely been the vast current account surpluses accumulated by east Asian economies with an export-led development strategy. In the case of China, there's the imperative need to maintain rapid economic growth to provide urban jobs for the tens of millions leaving the countryside each year. Critical here has been the rough peg of the yuan to the US dollar: this arrangement guarantees Chinese export competitiveness in US markets and has underpinned China's vast current account surplus (9.8% of GDP in 2004). This has partly been recycled into US government and commercial debt to the extent necessary to maintain the peg.
The upshot of this policy is that more than $2 trillion — half the world's total foreign currency reserves — have accumulated within the east Asian region in just the past four years. In January, China's central bank reported that China was on track this year to exceed $1 trillion in foreign exchange reserves. This would elevate China to the biggest holder of foreign currency, eclipsing Japan, which has $847 billion. At the end of April, Taiwan was the third largest holder of foreign currency reserves — $275 billion. South Korea, with $217 billion, was eclipsed that month by Russia, whose earnings from huge oil and gas exports pushed its foreign currency reserves to $225 billion.
At the same time, by maintaining a closely managed link to the US dollar the east Asian economies have been creating a de facto monetary zone (the embryo of an "Asian euro"), attracting foreign investment and reducing the pressure on their finance and banking systems.
But more savings than can be used in domestic investment are being generated elsewhere. Oil and gas exporting countries and even most of Latin America have become part of the "surplus club", with the result that between 1996 and 2004 the aggregate current accounts of all "emerging economies" with a surplus grew by $421 billion. The increase in the US CAD over the same period was $541 billion.
Yet these figures are dwarfed by the corporate surpluses that have accumulated in the imperialist heartlands. In the G7 countries (Britain, Canada, France, Germany, Italy, Japan and the US) in 2003-04 alone "excess savings" (undistributed profits less spending on capital) reached $1.3 trillion.
Within the US, the CAD would have been even bigger without this boost from the retained earnings of US corporations.
A strong contribution to inflows into the US also continues to come from foreign corporations, which are both pursuing a strategy of expansion through acquiring assets in the US, as well as parking part of their loot in "safe haven" US government debt (preferable to European or Japanese debt because of higher US interest rates).
Debate continues about the relative importance of the various factors driving the US CAD, but it is clearly a joint creation of relatively high rates of saving (i.e., low rates of consumption and investment) in the rest of the world economy, the specific export-driven development strategy of the east Asian economies, as well as of Washington's decision to fight the 2001 post-bubble downturn with very easy monetary and fiscal policy.
Can this CAD be gradually unwound by a gradual devaluation of the US dollar? Or is the US economy headed towards a CAD crisis, a loss of confidence in the dollar and a savage devaluation with unimaginable impact on the world economy? That debate will be the subject of the next article in this series.
[Dick Nichols is the managing editor of Seeing Red. For sources used in this article email <dicknichols@greenleft.org.au>.]
From Green Left Weekly, June 21 2006.
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