3.17.2005
Our Currency, Your Problem (NYTimes.com)
THE WAY WE LIVE NOW
By NIALL FERGUSON
Published: March 13, 2005
Every congressman knows that the United States currently runs large ''twin deficits'' on its budget and current accounts. Deficit 1, as we well know, is just the difference between federal tax revenues and expenditures. Deficit 2 is generally less well understood: it's the difference between all that Americans earn from foreigners (mainly from exports, services and investments abroad) and all that they pay out to foreigners (for imports, services and loans). When a government runs a deficit, it can tap public savings by selling bonds. But when the economy as a whole is running a deficit -- when American households are saving next to nothing of their disposable income -- there is no option but to borrow abroad.
There was a time when foreign investors were ready and willing to finance the U.S. current account deficit by buying large pieces of corporate America. But that's not the case today. Perhaps the most amazing economic fact of our time is that between 70 and 80 percent of the American economy's vast and continuing borrowing requirement is being met by foreign (mainly Asian) central banks.
Let's translate that into political terms. In effect, the Bush administration's combination of tax cuts for the Republican ''base'' and a Global War on Terror is being financed with a multibillion dollar overdraft facility at the People's Bank of China. Without East Asia, your mortgage might well be costing you more. The toys you buy for your kids certainly would.
Why are the Chinese monetary authorities so willing to underwrite American profligacy? Not out of altruism. The principal reason is that if they don't keep on buying dollars and dollar-based securities as fast as the Federal Reserve and the U.S. Treasury can print them, the dollar could slide substantially against the Chinese renminbi, much as it has declined against the euro over the past three years. Knowing the importance of the U.S. market to their export industries, the Chinese authorities dread such a dollar slide. The effect would be to raise the price, and hence reduce the appeal, of Chinese goods to American consumers -- and that includes everything from my snowproof hiking boots to the modem on my desk. A fall in exports would almost certainly translate into job losses in China at a time when millions of migrants from the countryside are pouring into the country's manufacturing sector.
(More ... The New York Times > Magazine > The Way We Live Now: Our Currency, Your Problem) ¶ 08:10
By NIALL FERGUSON
Published: March 13, 2005
Every congressman knows that the United States currently runs large ''twin deficits'' on its budget and current accounts. Deficit 1, as we well know, is just the difference between federal tax revenues and expenditures. Deficit 2 is generally less well understood: it's the difference between all that Americans earn from foreigners (mainly from exports, services and investments abroad) and all that they pay out to foreigners (for imports, services and loans). When a government runs a deficit, it can tap public savings by selling bonds. But when the economy as a whole is running a deficit -- when American households are saving next to nothing of their disposable income -- there is no option but to borrow abroad.
There was a time when foreign investors were ready and willing to finance the U.S. current account deficit by buying large pieces of corporate America. But that's not the case today. Perhaps the most amazing economic fact of our time is that between 70 and 80 percent of the American economy's vast and continuing borrowing requirement is being met by foreign (mainly Asian) central banks.
Let's translate that into political terms. In effect, the Bush administration's combination of tax cuts for the Republican ''base'' and a Global War on Terror is being financed with a multibillion dollar overdraft facility at the People's Bank of China. Without East Asia, your mortgage might well be costing you more. The toys you buy for your kids certainly would.
Why are the Chinese monetary authorities so willing to underwrite American profligacy? Not out of altruism. The principal reason is that if they don't keep on buying dollars and dollar-based securities as fast as the Federal Reserve and the U.S. Treasury can print them, the dollar could slide substantially against the Chinese renminbi, much as it has declined against the euro over the past three years. Knowing the importance of the U.S. market to their export industries, the Chinese authorities dread such a dollar slide. The effect would be to raise the price, and hence reduce the appeal, of Chinese goods to American consumers -- and that includes everything from my snowproof hiking boots to the modem on my desk. A fall in exports would almost certainly translate into job losses in China at a time when millions of migrants from the countryside are pouring into the country's manufacturing sector.
(More ... The New York Times > Magazine > The Way We Live Now: Our Currency, Your Problem) ¶ 08:10
