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| Picture Credit: AP |
Due to record high US trade and budget deficits and declining investor confidence in US bonds, stocks and currency, the dollar has been losing value, weakening its status as the world's major currency. By 2005, the rest of the world was subsidizing the US economy at a rate of more than $50 billion per month. But the US administration has largely ignored the issue.
Washington's policy of "non-intervention" may prove to have dangerous consequences, not only for the US economy, but for the entire dollar-tied global economy. After a decade of global currency crises, broad economic distress, and wrenching neo-liberal reorganization, the US crisis -- as well as that of ailing Japan -- may spell deeper international instability in the period ahead.
Articles
2011
America's Other 87 Deficits (November 3, 2011)
China can not take the sole blame for big US trade deficits. The author of this piece argues that the US cannot hold China responsible, as China is simply taking advantage of the US’ self-inflicted problems. The massive trade deficit the US is experiencing is a direct result of shortfall in the country’s net national savings. The blame game is simply taking attention away from those truly responsible for the biggest saving deficit in history. (Al Jazeera)
China Buys Gold, Challenges US Dollar (September 13, 2011)
According to recently released WikiLeaks cables, China is moving towards replacing massive foreign holdings from US dollars into gold. In addition, the market for the yuan is expanding, with European business officials stating recently that China will make the yuan fully convertible for trading on international markets by 2015. This shift towards buying gold, coupled with a convertible yuan, would undermine the US dollar’s current position as the dominant international reserve currency. As a key reserve currency, the US has been given a “big advantage,” that would be lost if gold, yuan or a combination of the two were to replace it. (Al Jazeera)
2010
Huge Deficits May Alter US Politics and Global Power (February 2, 2010)
The 2011 federal budget projections suggest that US deficits will not return to sustainable levels within the next 10 years, raising the question of whether the world's biggest spender can remain at the helm of global power, with China lending much of the money. It is possible that the US, like Japan in the past decade, will see a reduction in international influence as debt grows faster than income. (New York Times)
"No One Saw This Coming": Understanding Financial Crisis Through Accounting Models (June 16, 2009)
The author identifies experts who predicted the financial crisis, disproving the common notion that the recession was surprising. He points to 12 academics who recognized earlier instabilities and warned of an impending crisis. He finds that many of the predictions were accurate because they used accounting macroeconomic models, rather than equilibrium models, to foresee the credit crisis and recession. (Munich Personal RePEc Archive)Foreign Capital Flees the US; Outflow Hits Record $148.9 Billion as China Reloads (March 17, 2009)
US Treasury Department records show that the outflow of capital from the US in January 2009 totaled a record high of USD$148.9 billion. This capital flight raises concern over the funding of the increasing US government debt and large current-account deficit. Despite its slowed economic growth, China continues to purchase foreign assets, maintaining a large dollar surplus. (Wall Street Journal)
A Rising Dollar Lifts the US but Adds to the Crisis Abroad (March 9, 2009)
The unfolding global economic crisis reveals a deep and perverse irony. Despite being the cause of the financial crisis, the US benefits from China's purchase of US debt and the surge of dollars from American and foreign investors, who consider the US a safe haven. Meanwhile, low and middle income countries are hit the hardest as they struggle to raise money. The flow of dollars into the US, rather than, for example, countries in Eastern Europe makes it difficult for those countries to refinance their debt, which in the longer term, raises unemployment and poverty. (New York Times)
Macroeconomic Imbalances in the United States and Their Impact on the International Financial System (January 2009)
Linkages between US debt and the world's unhealthy reliance on the US dollar result in global instability and imbalances, at the roots of the world financial crisis. Arguing that the world economy has grown overly dependent on the US deficit, the author explains how the US debt has been necessary to supply reserves for the global economy, which enables economic expansion and growth. If the US reduced its overall debt, the volume of money in the global economy would contract, harming everyone. The crisis presents a turning point, showing the need to supersede the dollar as the international reserve currency and replace it with a new source of money supply - not reliant on one country's national currency. This change could lead to greater stability and equity in the global economy. (The Levy Economics Institute of Bard College)
US and UK on Brink of Debt Disaster (January 20, 2009)
This article rejects the theory that an influx of easy money, due to a global "savings glut", created the financial crisis in the US. Instead, the author places blame on the (UK and) US debt burden, pointing to the widening gap between growth of the real economy and exorbitant credit market debt in the US. The author argues that the government's response to the crisis, which focuses on providing more financial liquidity, will further increase the debt. Debt reducing bankruptcy and inflation policies present the only solution to resolving the economic crisis. (Reuters)
China Less Willing to Be America's Piggy Bank (December 22, 2007)
This New York Times article points out that China, a big financier of the US budget deficit, appears to be cutting back on its holdings of dollar-based securities. Since 2001, the US debt has grown by $1.7 trillion. Foreigners financed 75 percent - about $1.3 trillion – of this, with China alone holding $327 billion of the total US debt increase.
ECB Pumps Record Euros 348 Billion into Money Markets (December 18, 2007)
In an effort to bring down short term lending rates, the European Central Bank injected 348 billion euros into financial systems. International financial markets are experiencing a crisis of liquidity, and the ECB hopes their latest action will shock the markets back into shape. Analysts however, doubt this will solve the problems. They warn that the financial crisis will continue well into 2008 because of the continued uncertainty about who will bear the losses of the 2007 US mortgage crisis. (International Herald Tribune)
After the Money's Gone (December 14, 2007)
The US Federal Reserve has decided to lend US$40 billion to the banks affected by the US financial crisis. Economist Paul Krugman has little faith in the attempt. If the crisis was simply one of confidence and reduced liquidity, the Federal Reserve could restore balance easily, writes Krugman. However, in this instance the banks are truly insolvent and the crisis cannot be solved simply by increasing liquidity. (New York Times)
Housing Crash: Why a ‘Soft Landing' is Unlikely (December 12, 2007)
There is still plenty of air left in the US housing bubble, writes the author of this AlterNet article. He argues that housing prices will continue to fall drastically, and result in a constraint on consumer spending – the major driving force of the US economy. Stagnating incomes, severely constrained credit markets and falling housing prices together spell out recession for the US economy.
Slowing US Economy Inflicts Pain around the World (December 10, 2007)
Experts say the 2007 US financial crisis is the first real test of the financial globalization that has taken place since 1989, resulting in increasingly integrated global markets. Former chief economist at the International Monetary Fund, Kenneth Rogoff, warns that the US crisis could "pull everyone into its vortex," as far away events are transmitted through financial channels. (USA Today)
The Making of a Mess (December 3, 2007)
International financial markets and their transactions are extremely complex, and investors realize that they no longer understand the system in which they operate. Following the collapse of the US housing market, investors' lack of trust in the markets has resulted in a drying up of liquidity, reduced lending in credit markets and a threat of a recession. (International Herald Tribune)
Subprime: Tentacles of a Crisis (December 2007)
Senior IMF Financial Expert Randall Dodd explains in the IMF quarterly Finance and Development
how problems in US subprime mortgages in 2007 led to worldwide financial turmoil. Dodd provides a historical and structural overview of the US mortgage market, showing how a blurry system of poor regulation and fraudulent practices developed in the 20th century.
The Economic Consequences of Mr. Bush (December 2007)
Joseph Stiglitz argues in this Vanity Fair article that George Bush will take over Herbert Hoover's reputation as the US's worst president when it comes to handling the US economy. After eight years of Bush's presidency, the US economy is suffering from a pro-rich tax system, a record high trade deficit, sky-high oil prices and a falling dollar value. The falling dollar, along with tight labor and credit markets, may see the US facing a recession in 2008. Stiglitz forecasts that the US public will suffer the consequences of Bush's economic policies for generations to come.
Why America's Currency Is the World's Problem (November 30, 2007)
In 2007, the euro was valued at symbolic US$1.50, the highest value against the dollar since the euro's inception. The relationship between the two currencies illustrates the depreciating state of the US economy, and may signal the end of the "dollar era." The fall of the dollar will affect all global markets, and because of the many uncertainties in global monetary structures, the "potential dangers" for the world economy are great, warns the author of this Spiegel article.
Who Gains When the Dollar Sinks? (November 27, 2007)
The US dollar is the primary currency of the international economic system. But, the value of the dollar has fallen 30 percent between 2001 and 2007. This trend highlights the problems of an economy that supports high military and consumer spending. The decline in the US dollar has a negative impact on economies that rely on exports to the US. And, a weak dollar also reduces Washington's ability to project its economic strength abroad. This YaleGlobal article says the global economic system is becoming less US-centric as international businesses switch from making their payments in dollars to euros.
OPEC Interested in Non-Dollar Currency (November 18, 2007)
In reaction to the fall in the value of the dollar, OPEC has decided to make an enquiry into shifting cash reserves to a non-dollar currency. The suggestion came from Iran and Venezuela, who also have political reasons for moving away from the dollar. US allies such as Saudi Arabia opposed the idea. The dollar depreciation has led to higher crude oil prices and lowered dollar reserves for the oil producing countries, who worry about future profits dwindling if reserves continue to be held in US dollars. (Associated Press)
Who's Afraid of a Falling Dollar? (November 8, 2007)
In this AlterNet article, the author explains why a falling dollar is positive for the US economy. An overvalued dollar has caused the US to lend beyond its means and accumulate a huge trade deficit. A lower dollar value will reverse the trend, and it will make US products more competitive on international markets. Imports will become more expensive, which will provide a stimulus to the US domestic market and probably lead to increased job creation.
From Credit Mess, Lessons About Government (November 8, 2007)
This article from the Wall Street Journal refutes the suggestion that "government should be run more like a business." The US credit crisis of 2007 illustrates that business, too, can be inefficient and lack transparency. The author suggests critics can learn several lessons from the crisis; that government is the best bet to protect vulnerable consumers, that regulation of financial markets can be beneficial and that the Federal Reserve is still a relevant and necessary institution.
Anatomy of a Credit Crisis (November 6, 2007)
This article argues that the Asian financial crisis in the late 1990s ultimately led to the 2007 credit crisis in the US and UK. In response to the Asian crisis, affected countries increased the rate of savings and foreign currency reserves. This had the effect of lowering international long-term interest rates. Low inflation resulted in a lower short-term interest rate and investors had to seek riskier business initiatives in order to keep up high rates of return. One such initiative was the creation of sub-prime mortgage lending, the most immediate cause for the US credit crisis in 2007. (Independent)
A Catastrophe Foretold (October 26, 2007)
In this New York Times commentary, Paul Krugman blames ideology for the 2007 US mortgage crisis. From 2000, Federal Reserve officials warned of a possible crisis, but Federal Reserve Chairman Alan Greenspan ignored the warnings. According to Krugman, Washington is still ruled by a free market ideology that dismisses the importance of government regulation. Krugman hopes the latest crisis will remind federal officials of why financial regulation was once introduced.
1929 Redux: Heading for a Crash? (October 11, 2007)
This transcript of journalist Robert Kuttner's testimony to the House Financial Services was published by AlterNet. In his testimony, Kuttner draws attention to the similarities between today's financial situation and the circumstances surrounding the 1929 crash. He warns against the strong belief many US officials have in self-regulating markets and calls for a higher degree of financial regulation in order to reduce the risk of another major financial crisis.
The Financial Crisis: Burst Bubble, Frayed Model (October 1, 2007)
This article by economics professor Robert Wade explains the financial crisis brought about by turmoil in the US mortgage markets. He discusses the impact of trade imbalances in general and the US trade deficit in particular, the role of consumer debt and the importance of the US total debt-to-GDP ratio for future global economic growth. Wade suggests that the financial turmoil might encourage the US to shift from a neo-liberal economy and more government control on markets. (openDemocracy)
Fears of Dollar Collapse as Saudis Take Fright (September 19, 2007)
Saudi Arabia and the rest of the Middle East together hold US$3,500billion. As a close ally of the US, Saudi Arabia has kept its currency pegged to the dollar. However, with Saudi Arabia facing inflation while the US is possibly entering a period of recession, the Saudis refuse to conform to US monetary policy. When the US recently cut interest rates, Saudi Arabia stayed put and analysts worry that this could have serious consequences in the form of a "stampede out of the dollar." (Telegraph)
Cut Fuel Use and the Trade Deficit (September 14, 2007)
To lower its trade deficit, the US should cut the consumption and import of fossil fuels, argues the author of this National Journal article. Methods to cut fuel consumption in the US are readily available and by using them, the US could lower its energy demand by 0.3 percent every year. The author argues that the US must focus on lowering the demand for energy rather than simply switching to cleaner energy technology. The US could achieve this by raising energy prices (taxes) to European levels.
Dollar's Retreat Raises Fear of Collapse (September 13, 2007)
The world has been willing to finance the US' trade deficit for longer than most economists had predicted. With the 2007 turmoil in the US financial markets, this trend might change. Economist Kenneth Rogoff suggests that the deficit will see a sudden reduction and that the US will experience a major fall in the value of the dollar. Growth in the US economy is slowing down and employment rates are falling. Major US retailers report a decline in consumer spending, leading to a decline in imports. This reduces the need for capital to flow into the US economy. Capital inflows will also be decreased by a loss of confidence in the US currency, all contributing to a further deterioration in the value of the dollar. (International Herald Tribune)
"Fed, We Have A Problem" (September 12, 2007)
The author of this YaleGlobal article presents a fictional dialogue between the US treasury secretary and a Chinese official on the effects of lowering US interest rates. The author warns against a growing US trade deficit and fall in the value of the dollar, which would harm global trade and the Chinese economy in particular. On the other hand, China, the major creditor to the US, may act as a potential stabilizer should the US economy go into recession. The author therefore warns the US against taking the trade with China for granted. He urges the US to keep Chinese interests in mind when developing financial policy, be it interest rate changes or decisions on who gets to invest in the US economy.
The "Carry Trade" and the Current Financial Turmoil (July-August 2007)
US deregulation and liberalization of finance at home and abroad has created vast amounts of liquidity in global financial markets. This has resulted in great interdependencies between financial markets and between currencies. Investors use of "carry trading" – borrowing money in a currency with low interest rates and investing in a currency with higher interest rate gains - creates large volatility in financial markets, making the markets increasingly vulnerable to risk and to sudden changes in currency values. (Third World Resurgence)
Healthy Correction or Start of Deeper Turmoil? (July - August 2007)
This World Economy and Development article analyzes the sharp falls in stock markets around the world. The plunging stock markets affect currencies, capital flows and the "real economy" of production and jobs and could represent "a correction period" or a new phase of "financial volatility." Experts have long predicted that the US' "massive foreign trade deficits" coupled with an unregulated capital market could cause long-term financial turmoil.
China Threatens 'Nuclear Option' of Dollar Sales (August 8, 2007)
The Chinese government announced that if the US inflicts trade sanctions forcing a Yuan revaluation, China could "liquidate its holdings of US treasuries," causing a fall of the dollar. A dollar crash would hit the US housing market and send the economy into recession. But an official at the Chinese Academy of Social Sciences stated that China is unlikely to do this as long as the Yuan's exchange rate remains stable against the dollar. (Telegraph)
IMF Adopts New Currency Rules (June 18, 2007)
The International Monetary Fund has adopted new rules for how countries should carry out their foreign currency policy. IMF Managing Director Rodrigo de Rato stated that "this measure will ensure that member states avoid exchange rate policies that result in external instability." This development goes a long way towards satisfying US demands for the IMF to play a more aggressive role on exchange rates. The US has tried for many years to get China to allow its currency to rise in value against the dollar in order to reduce the US-China trade gap. (Associated Press)
Dollar's Drop Challenges US Power (April 27, 2007)
Experts warn that the US dollar's record low against the euro may challenge the US position as "an unrivaled global power." Despite the country's military superiority, this Reuters article argues that the steadily weakening economy, "especially as the war in Iraq strains both US finances and credibility," poses a serious threat to US hegemony.
Iran Leads Attack against US Dollar (April 12, 2007)
This Global Research article reports that Iran is "waging economic war" against the US by ending all oil sales in US dollars. The shift to the euro and other currencies could encourage large holders of dollars – such as China, which buys more than 10 percent of its crude oil from Iran – to diversify their foreign exchange reserve portfolios. Because these holdings "are vital to financing the continuing US federal budget deficits," the move to non-dollar currencies seriously threatens US economic stability.
US Deficit Is Shrinking, For Now (February 21, 2007)
Although the US federal deficit has decreased, a balanced budget is unlikely "anytime in the near or long term," warns this Christian Science Monitor article. The Bush administration's tax cuts and the continued costs of the wars in Iraq and Afghanistan will likely hinder economic growth and increase the national debt, leading most economists to agree that "the long-term outlook remains sobering."
Backlash Grows Against Free Trade (February 16, 2007)
Although many economists see free trade as the solution to ending global poverty, some experts argue it can only live up to this promise as long as "powerful, growth-producing forces" share the benefits and gains among trade's "losers." A record-high trade deficit for the fifth year in a row may force even the US, a leading proponent of free trade, to begin considering "the dark side" of global commerce. (Christian Science Monitor)
How US Is Deferring War Costs (January 16, 2007)
US President George W. Bush's "borrow now, pay later" approach to financing the war in Iraq means that future generations and foreign creditors to the US will bear the cost, which some economists estimate to be as high as US $2 trillion. With the Bush administration's continued tax cut policies and its plan to increase the number of troops in Iraq, members of Congress are increasingly concerned over the sustainability of this deficit spending. (Christian Science Monitor)
The Weak Dollar Does Little to Help Correct America's Trade Imbalance (January 16, 2007)
With the US trade deficit nearing a record high, economists fear that the increase of US exports caused by the weakening of the dollar against major world currencies will be insufficient to offset the imbalance. China's fixed exchange rate policy, which ensures that the Chinese yuan does not appreciate against the dollar, is one factor hindering significant international trade adjustments. (International Herald Tribune)
Euro Gives Dollar a Run for its Money (January 8, 2007)
Although the US dollar remains the dominant international currency, the euro is "catching up rapidly," reports this Christian Science Monitor article. Therefore, in response to the decline in value of the dollar against the euro, foreign central bankers have increased the percentage of euros in their foreign exchange reserves, as continued depreciation could cause significant losses for those countries holding large amounts of US dollars.
The Dollar Melts as Iraq Burns (December 4, 2006)
In this Guardian article James Galbraith, Chair of Economists for Peace and Security draws attention to the link between security and finance in international relations. The "economically illiterate neo-imperialists" who decided to invade Iraq failed to understand the financial importance of international confidence in the US, and how the invasion would put that confidence at stake, says Galbraith. Drawing parallels to mid 20th century British circumstances of coinciding "imperial retreat," trade deficits, and a falling pound, Galbraith argues that the failure of the 2003 US-led Iraq invasion "may finally be catching up [on] the almighty dollar."
Struggling US Dollar Triggers Currency Concerns (November 28, 2006)
When Chinese officials hinted in late November 2006 that holding dollars might be a bad investment strategy, renewed fears erupted that the Chinese central bank will begin disposing of its 1 trillion US dollar reserve, says the Globe and Mail. Subsequent plunging investor confidence in the US currency caused the dollar to fall to a 20 month low against the euro and a 2-year low against the pound. Meanwhile possible interest rate cuts in the US and interest rises in Europe could further increase the demand for euros relative to dollars. A US business professor blames the currency imbalances on Chinese reluctance to let their currency float, and says the imbalances could result in "trade chaos."
International Trade Statistics 2006 (November 9, 2006)
In some 250 tables and charts, the annual World Trade Organization publication provides statistics on world trade flows of merchandise and commercial services by country, region and product in 2005 as well as some longer term world trade trends data. An overview summarizes major developments. These include: an overall slow-down in world trade expansion; a shift in textiles and clothing exports from Latin America and Africa to China, India and Pakistan due to the phase-out of the WTO Agreement on Textiles and Clothing; and a further increase in oil-exporters' trade surpluses while the US trade deficit reached a record high of US$793 billion.
US Household Deficit Spending: A Rendezvous with Reality (November 2006)
This Levy Economics Institute of Bard College paper, with illustrative graphs, analyzes the financial balance of US households. As the gap between income and expenditure has continued to expand over the last decade, US households can no longer avoid the "debt-trap dynamics," says the author. When household income growth is below the average interest on household debt, only increasing asset prices would allow continued deficit spending. And with the US economy possibly "enter[ing] a period of home price deflation," the author foresees a decrease in US consumer spending that will jeopardize economic growth both in the US and beyond.
America and the Dollar Illusion (October 25, 2006)
This Der Spiegel piece wittily spells out the unsustainable nature of the dollar value. Every investor knows that in the "the long term, currencies can't be stronger than the national economies from which they derive," and with a US economy that consumes way more than it produces, devaluation is inevitable. So far, only the financial security deriving from US political stability and economic size, and the spread of the dollar has ensured that savers worldwide hold 60 percent of their reserves in the US currency. With the whole world depending on the dollar and on exports to the recession-bound US, the economic crisis that will follow dollar devaluation could prove worldwide.
America's Middle Class Has Become Globalization's Loser (October 24, 2006)
Der Spiegel argues that the "undoubtedly superior United States doesn't exist anymore." Once a pillar of success in the global marketplace, the US must now cope with a massive trade imbalance, which brings rising unemployment and less purchasing power among its population. The inability of US corporations to compete with their counterparts abroad has shifted the power balance to other regions of the world, challenging the economic dominance of the US.
How to Fix the Global Economy (October 3, 2006)
World leaders increasingly agree on the unsustainable nature of the global financial imbalances represented by an enormous US trade deficit and China's growing trade surplus. Economics professor Joseph Stiglitz appreciates the growing attention given to the problem, but regrets that responses seem to address only symptoms rather than "the larger systemic problem." Stiglitz argues that neither a strengthening of the Chinese Yuan nor a cut in US governmental expenditures alone will solve the problem. Instead, expenditure cuts combined with increased upper-income taxes and reduced lower-income taxes in the US will create the necessary incentives. (New York Times)
US Foreign Debt Shows Its Teeth as Rates Climb (September 25, 2006)
The US has so far succeeded in keeping its net foreign debt interest payments from increasing despite continuously borrowing more from abroad, the Wall Street Journal reports. This has largely been due to a US ability to borrow cheaply while earning good money on its own foreign investments. But, with rising US interest rates, this cannot go on much longer, the author warns. Economists worry about the fast pace of US debt accumulation leading to larger interest payments, that could spur a vicious circle, if foreign investors demand even higher interest rates as compensation for added risk. At a minimum, increased debt payments will force US citizens to either work harder or see their living standards fall.
Inflation's Sources Hard to Domesticate (July 19, 2006)
Although US Federal Reserve chairman Ben Bernanke oversees domestic means to regulate inflation, he does not control its root causes. Economist David Kelly argues that "global tensions and growth in foreign countries" drive inflation of commodity prices. This observation underscores the fact that increasing interest rates to counter commodity inflation might slow the US economy and further harm consumers. (Los Angeles Times)
Not Raining on the President's Parade (July 12, 2006)
This article confirms US President George Bush's declaration that the 2006 federal budget deficit will total less than predicted. However, the Federal government acts dangerously by spending a greater percentage of the overall economy. As baby boomers reach retirement and increase demands on the Social Security and Medicare systems, the government could prepare by cutting spending and increasing taxes. (Common Dreams)
US Net Debt Increases 14% to Record-Level $2.69 Trillion (June 30, 2006)
This Wall Street Journal article notes that in its twentieth year as a debtor nation, the US has fallen further into debt to the rest of the world. If the US economic growth slows, foreign investors may look elsewhere and cause interest rates to rise, the dollar to weaken, and the economy to contract. While many economists see this as an urgent problem, the author optimistically thinks that an expanding US economy will support an increasing debt.
Inflation Jitters? (June 21, 2006)
By raising interest rates to prevent increasing inflation, the Federal Reserve and Chairman Benjamin Bernanke overlook a greater problem. The author argues that unemployment and rising oil and commodity prices will likely result in deflation rather than the inflation that Bernanke and the Federal Reserve fear. Wage stagnation often accompanies deflation and leads to declining consumer purchasing power, which would impact not only the US but also the global economy. (Minnesota Public Radio)
Why Dollar Hegemony Is Unhealthy: The World's Dangerous Dependence on the US Dollar Risks Hurting All (June 20, 2006)
Although investors worldwide look to the dollar as a source of stability, factors like decreasing US consumer spending, increasing US interest rates or tighter lending criteria could lead to the collapse of the dollar. The author notes that investors and countries recognize and resent the imbalance of payments in the US, but still rely on the US market. To counter this "dysfunctional co-dependence," the rest of the world could develop alternative consumers to the overextended US consumers by raising low wages and encouraging consumption in other rich countries. (YaleGlobal)
Global Economy: The Mark of the Bust (June 14, 2006)
This article discusses the significance of the quantity of government securities held for foreign central banks. This number affects the dollars available to creditors in the private sector who wish to invest in the US. The author suggests that a sudden and drastic increase in official foreign holdings could negatively affect the value of the dollar. If foreign investors decide that they can find more profitable investments in countries other than the US then the price of US assets and stocks will decline. (New York Times)
Can the Growth in the US Current Account Deficit Be Sustained? The Growing Burden of Servicing Foreign-Owned US Debt (May 2006)
This Levy Economics Institute of Bard College strategic analysis suggests that low interest rates and large returns on US foreign direct investment mask the increasing severity of US debt. Furthermore, US policymakers looking to market forces to resolve imbalances create discomfort among foreign central banks and holders of US securities. Temporary measures to quell these fears may fail, resulting in an increased US debt to foreigners.
Are Poor Nations Wasting Their Money on Dollars? (April 30, 2006)
International reserves held by poor countries have tripled since 2002, amounting to US$2.9 trillion at the end of 2005. Aware of the disturbing economic and social effects of past financial crisis, many countries opted for macroeconomic stability and political independence by accumulating vast sums of low-return US Treasury bonds. This New York Times article argues that many poor countries pay a "high price" for their caution since the money could foster development in areas such as health care or education.
CSI: Trade Deficit (April 24, 2006)
The New York Times' Paul Krugman analyzes the "mystery" of the huge US trade deficit. To finance its deficit, the US borrows money from foreigners by selling US stocks and assets. Following this logic, statistics would normally show a deficit in investments - but they do not. Refusing to believe in the intangible strengths of US exports, this article focuses on the contradiction that foreigners continue investing in the US, when return rates are as low as 2.2%. For tax reasons, foreign companies understate their earnings and reinvest the hidden surplus in their US operations. As statistics fail to reflect this, the "real US deficit" could be much worse.
The House Price Bubble: Won't Get Fooled Again (April 8, 2006)
While some studies neglect the existence of a housing bubble in the US, Thomas Palley warns against disregarding some basic economic considerations within the calculations of present and future house values. When the comparison of the long-term costs of buying and renting a house is based on the assumption that house prices continuously rise, "there cannot by definition have been a bubble." In addition, with more houses being build and many private households on the brink of bankruptcy, prices could soon drop.
Examining Global Imbalances (March 2006)
In 2004, the US gained more through its US$9.97 trillion of foreign assets than it paid for its US$12.52 trillion of foreign liabilities. Finance & Development looks at how the US, the world's biggest debtor, surprisingly manages to maintain this investment surplus that allows the country to run a huge trade deficit. Due to the depreciation of the dollar since 2002, the US has benefited from high returns in countries with stronger currencies while foreign liabilities -mostly debt issued in US dollar- suffered from the weak dollar. Nevertheless, in the long run, only a large decrease of the US trade deficit can rebalance the world economy.
Debt and Denial (February 13, 2006)
In the 19th century, the US borrowed money to finance solid investments, like industrial infrastructure. Today, however, the country spends its debt on consumption, new houses and the trade deficit. This New York Times article argues that despite some recent "don't worry, be happy"-attitudes, the US economy will likely experience a hard landing.
Export-Led Growth: The Elephant in the Room (January 17, 2006)
This article argues that many emerging economies have benefited from their export-led growth to the US market. However, by financing the huge US trade-deficit with growing US$ deposits, these countries now face a very unstable financial future. Thomas Palley offers several scenarios about how the world economy "may soon face a harsh wake-up call."
US Economy Faces Large Imbalances in 2006 (December 30, 2005)
According to Bloomberg News' latest forecasts, the US GDP will grow by about 3.4 percent in 2006. However, this article points out that the forecast is actually not so bright. Economic imbalances such as the speculative housing bubble and the trade deficit represent worrying trends. Moreover, the current rate of borrowing and consumption is unsustainable. All of these factors might lead to a recession, not to growth. (Center for Economic and Policy Research)
Bursting Bernanke's Bubble (October 31, 2005)
The Chairman of the US Federal Reserve Ben Bernanke declared that he will continue his predecessor Alan Greenspan's monetary policy. This TomPaine article warns that this would not "necessarily be the best thing for the US economy." Greenspan's policy contributed to a real estate bubble, an outstanding federal debt, a remarkable trade deficit and an overvalued dollar.
The Economy: Doubts on the Horizon (October 4, 2005)
The Bush administration has squandered the budget surplus inherited by the second Clinton administration and created a deficit that "would be illegal under European monetary rules." War expenditures and the costs of recovery for hurricane Katrina played a key role in increasing such a deficit. Looking at the latest trends of the US economy, this article warns that "the United States is living dangerously." (Stratfor)
Iran's Oil Gambit - and Potential Affront to the US (August 30, 2005)
The Iranian government has announced plans to set up an international oil trading exchange that would trade petroleum products in euros instead of US dollars. This could potentially undermine the standing of the US dollar, but experts doubt that trading business will shift from London and New York to Tehran any time soon. The Iranian government has also struck important oil and gas deals with India and China, winning allies to the East as it faces nuclear criticism from the West. These moves signify Iran's effort to "stay on the offensive," the author argues, as pressure from Washington mounts. (Christian Science Monitor)
China Unpegs Itself (July 22, 2005)
China's decision to unpeg its currency from the US dollar could mark the beginning of the end for "the free ride China has been giving America," contends this New York Times op-ed article. For the past several years, the world's richest country has received cheap loans from China. Beijing has bought huge quantities of US dollars and government bonds in an effort to keep its own currency from appreciating. If China's dollar purchases finally trail off one day, the result could be a sharp fall in the value of the dollar and a rise in US interest rates.
Another Drink? Sure. China Is Paying. (June 5, 2005)
After the wave of economic crises in the 1990's, poor countries amassed considerable amounts of foreign capital to protect their markets. The extra cash has put developing countries in a unique position: in a reversal of conventional economic theory, poor countries are funding the US' current spending binge. Despite record trade deficits and a falling dollar, the US continues to increase spending, requiring loans from poorer nations. (New York Times)
Globalization Game (May 31, 2005)
In an attempt to cut the ballooning trade deficit, the US administration has been pressing China to revalue its currency. But according to this Boston Globe opinion piece, the real reason behind the trade imbalance does not lie in exchange rates but in the fact that "globalization is broken." Globalization has evolved into a kind of pyramid scheme, in which the US must "consume and borrow ever more while foreign banks buy ever more US Treasuries so their producers can export ever more." Quick fixes like adjusting the exchange rate will not solve the problem; the only way to avoid a global economic crisis is to "insist that the globalization game be played the same way by all its players," the author argues.
Attention: Deficit Disorder (May 13, 2005)
In this New York Times opinion piece, Citigroup Director and former US Treasure Secretary Robert E. Rubin calls for measures to close the widening US fiscal deficit gap. As the deficit is due to revenue shortfall as much as to excessive government spending, Rubin suggests both repealing some tax cuts and reforming Medicare. He clearly favors this option to simply turning a blind eye or concentrating on a costly Social Security reform that would only increase the budget deficit in the short run. "[T]he odds are extremely low that our fiscal imbalances will solve themselves, and we place ourselves at great peril by not facing these realities," Rubin says.
The Thrift Imperative (May 5, 2005)
For the past three years, the US national savings rate has been lower than at any time since 1934. Instead of saving and investing, both individuals and the government have preferred to borrow and spend, thus increasing the trade and budget deficits. According to this New York Times editorial, Congress and the Bush administration should refrain from passing more tax cuts and focus their efforts on increasing personal savings instead.
Greenspan Says He Expects Tax Increases (April 22, 2005)
In his testimony before the US Senate Budget Committee, Federal Reserve Chairman Alan Greenspan "pleaded guilty" to supporting the 2001 tax cuts that have contributed to the increasing US federal budget deficits. However, he pointed out that he had called for a "trigger mechanism" that would limit cuts "if certain budget targets were not met" - a measure that lawmakers refused to accept when passing the tax cuts. Greenspan also anticipates that Congress will finally end up raising taxes when trying to reach a compromise on how to shrink the mushrooming budget deficit. (Washington Post)
An Economy on Thin Ice (April 10, 2005)
In this Washington Post article, former Chairman of the US Federal Reserve Paul Volcker voices his concern over the record-low savings rate and the growing trade and budget deficits in the US. He warns that the "seemingly comfortable pattern" of low interest rates, vanishing savings and strong economic growth could end in a hard landing unless the US administration and lawmakers act now, even if "on the surface, everything seems so placid and favorable."
Elite Protectionists (March 24, 2005)
The rapidly swelling trade deficit has prompted even some US free traders to demand tariffs on Chinese imports unless the country agrees to let its undervalued currency appreciate. These initiatives could mark "the start of a break from the era of US-led globalization in which Washington preached unfettered trade to the rest of the world" and "ignite a more honest public debate on globalization," says this Nation
article.
Free of Quota, China Textiles Flood the US (March 10, 2005)
In the first month after phasing out global textile quotas, Chinese imports to the United States soared by 75 percent. The figure bears some of the first evidence that China could be prepared to dominate global textile trade, leaving people jobless in other poor countries and increasing the already gaping trade imbalance with the US. (New York Times)
Greenspan Says Federal Budget Deficits Are "Unsustainable" (March 3, 2005)
In his gloomiest assessment to date, US Federal Reserve chairman Alan Greenspan warned that closing the budget gap will become much more difficult if Congress fails to take major action to reduce the deficits. Greenspan called for reinstating the "pay as you go" spending rules, which would make it practically impossible for the Bush administration to make the temporary tax cuts of 2001 and 2003 permanent. (New York Times)
High Price of the Cheap Dollar (March 2005)
For the past few years, the US administration has calmly relied on the weakening dollar to reduce the growing trade deficit. At the same time, Asian central banks have invested heavily in US treasury bills, creating a cycle in which trade deficits help fund the US budget deficit. But the depreciation of the dollar has not done enough to correct the gaping trade imbalance. In response, the Bush administration has now changed its attitude toward the twin deficits, betting on "fanciful" budget assumptions and tax cuts to generate economic growth and a sharp rise in revenues. (Le Monde diplomatique)
Honey, I Shrunk the Dollar (February 24, 2005)
The dollar is falling, yet the Bush administration stubbornly refuses to address two major economic vulnerabilities: US dependence on foreign oil and capital imports. In time, this may cause foreigners to withdraw their investments from US treasury bonds. "When a country lives on borrowed time, borrowed money and borrowed energy, it is just begging the markets to discipline it in their own way at their own time," says this New York Times op-ed piece.
'04 Trade Deficit Sets Record, $617 Billion (February 11, 2005)
The US trade deficit reached a new high in 2004, exceeding the previous record of 2003 by a whopping 24.4 percent. Yet the Bush administration sees a rosy future in the alarming figures. According to administration officials, the deficit has widened because "foreigners are eager to invest in the US" and because US consumers have more disposable income to buy imports than their counterparts in other industrialized countries. (New York Times)
Bush's Bad Math (February 8, 2005)
By slashing spending on education, environment, housing and health care, President Bush's new budget proposal aims to cut the federal deficit in half by 2009. But the proposal does not include funding for military operations in Iraq and Afghanistan, nor for the intended social security reform. Together with a plan to make the administration's tax cuts permanent, the budget proposal will increase the deficits rather than curtail them. (San Francisco Chronicle)
UN Says US Deficits Distort Global Economy (January 25, 2005)
The US twin deficits threaten global economic stability, warns the UN report "World Economic Situation and Prospects 2005." According to the report, the rapid depreciation of the dollar alone will not reduce the imbalances in the world economy. Instead, the UN urges all major industrial countries to work together to avoid a hard landing. (New York Times)
The Naked Hegemon: Why the Emperor Has No Clothes (January 6, 2005)
For decades, the privilege of printing the world's reserve currency has enabled the US government and private citizens to spend at will and save virtually nothing. But what will happen if the world's confidence in the dollar runs out? According to this Asia Times article, the result could be "a wholesale fundamental reorganization of the world political economy."
Destination USA (January 3, 2005)
In this opinion piece from the Wall Street Journal, right-wing economist Arthur B. Laffer reacts to concerns about national and global economic consequences of the largest US trade deficit ever. Contrary to mainstream conservative economists such as those at the International Monetary Fund, Laffer argues that the deficit is a sign of the country's "privileged status as the most pro-growth, free market, rule of law economy the world has ever known."
This Can't Go On Forever - So It Won't (January 1, 2005)
In his 2005 global economic forecast, Nobel Prize winning economist Joseph Stiglitz predicts a gloomy year primarily due to high oil prices and a weakened dollar. Because of "the problems of the present and the mistakes of the past," such as US budget deficit, the country's quest for oil and Europe's macroeconomic troubles, the world's major economies will experience a slowdown. (Guardian)
