With the weak dollar hanging like the sword of Damocles over the global economy, almost everyone laments America's spendthrift habits. But did it ever occur to anybody how hard Americans must work to make everyone else look good?
Thanks to the US' gaping trade deficits, the biggest headache of every developing country finance minister nowadays is trying to keep his or her country's currency from going up too fast against the dollar. When was the last time that happened? Chronic debt-crisis countries from Mexico to Russia to South Korea are all fighting off capital inflows from investors looking for an exit as the dollar collapses.
ILLUSTRATION MOUNTAIN PEOPLE
Ordinarily, as the world comes out of a downturn and global interest rates rise, at least one or two emerging market countries suffers a spectacular blowup. Not likely this time, at least for the next year.
True, policy in some countries has improved markedly. Brazil and Turkey, for example, have each instituted market-friendly policies that have made their economies more flexible and growth more durable. But can the same be said for Mexico, where reform has stalled, or for Russia, where reforms have been reversed? The US' reckless deficit spending is making all their currencies look like good investments for this year.
So non-Americans should be more appreciative of the US' deficits. Do people think it is easy for a US$12 trillion economy to spend beyond its means year after year just to prop up other countries' reputations for stability? It isn't. Going deep into debt when you have that much money to spend takes a lot of hard work.
Start with the US consumer, who consumes everything on earth (helping the US eat up 25 percent of world oil production) but saves essentially nothing. Thanks to America's gold-plated financial system, its consumers can buy fancy cars with almost no down payment. They can borrow more and more each year against the value of their homes, and spend every cent. They can retire earlier and earlier on their smaller and smaller savings. It takes nerve and energy to live like that.
Of course, the US government does it share, too, and more. When President George W. Bush took office in 2001, he was staring at giant budget surpluses as far as the eye could see. It was hard work engineering a US$5 trillion deterioration in the US' fiscal position.
Cutting taxes was easy, but hiking spending on virtually every program involves a lot of legislation. Sure, the decision to invade Iraq was a big help in pushing the country's finances off a cliff, but that is far from the whole story. So why is the world so ungrateful?
Maybe some Europeans and Japanese are upset that they have consistently earned such poor returns on their US investments. Part of the problem has been the sinking dollar, which makes dollar investments look bad when translated into yen or euro.
Part of the blame also lies with bad market timing. Many Europeans bought into the US stock market at its peak in 1999 and 2000, only to find themselves selling at steep discounts after the collapse of 2001.
The same happened to the Japanese in real estate. Japanese financiers bought up pricey trophy properties like Rockefeller Center in New York and the Pebble Beach Golf Club in California, and then had to sell later at rock-bottom prices. These investment failures have been great for Americans, who owe a lot less to foreigners than they would otherwise.
Unfortunately, this cannot go on forever. Foreigners are either going to start earning much better returns in the US, pushing American debt levels into unsustainable territory, or else they will pull back and invest elsewhere. Either way, the dollar collapse has to continue.
So how low can the dollar sink? By my calculations, the dollar still needs to go down another 15 percent if the US trade deficit is to go back toward balance. Ideally, Asian currencies would rise much more than 15 percent while European currencies would rise less.
Unfortunately, there is a real danger that we may see the opposite, with the euro going to US$1.50 or beyond. Governments may try to resist the fall of the dollar, but in today's world of deep and fluid capital markets, they will not succeed indefinitely, even in Asia.
Moreover, although US policy is making everyone else look good for now, things might not be so comfortable if the dollar collapse leads to skyrocketing interest rates and a sustained global slowdown. Some of the countries that look so strong today may suddenly experience the kind of financial crises that they thought they had left behind.
Even if countries avoid the immediate blow of a dollar collapse, they still have to watch for a boomerang effect. Exchange rates have a nasty habit of overshooting their equilibrium values, then knifing back on countries, especially those who have been spending too much based on inflated income valuations.
OK, so maybe it is too soon for the world to start toasting the US' insane consumption patterns. Even so, isn't it generous of the Americans to make everyone else look so sober and frugal, if only for the moment?
Kenneth Rogoff is professor of economics and public policy at Harvard University, and was formerly chief economist at the IMF.
Copyright: Project Syndicate
Saudi Arabian largesse is flooding Egypt’s cultural scene, but the reception is mixed. Some welcome new “cooperation” between two regional powerhouses, while others fear a hostile takeover by Riyadh. In Cairo, historically the cultural capital of the Arab world, Egyptian Minister of Culture Nevine al-Kilany recently hosted Saudi Arabian General Entertainment Authority chairman Turki al-Sheikh. The deep-pocketed al-Sheikh has emerged as a Medici-like patron for Egypt’s cultural elite, courted by Cairo’s top talent to produce a slew of forthcoming films. A new three-way agreement between al-Sheikh, Kilany and United Media Services — a multi-media conglomerate linked to state intelligence that owns much of
The US and other countries should take concrete steps to confront the threats from Beijing to avoid war, US Representative Mario Diaz-Balart said in an interview with Voice of America on March 13. The US should use “every diplomatic economic tool at our disposal to treat China as what it is... to avoid war,” Diaz-Balart said. Giving an example of what the US could do, he said that it has to be more aggressive in its military sales to Taiwan. Actions by cross-party US lawmakers in the past few years such as meeting with Taiwanese officials in Washington and Taipei, and
Denmark’s “one China” policy more and more resembles Beijing’s “one China” principle. At least, this is how things appear. In recent interactions with the Danish state, such as applying for residency permits, a Taiwanese’s nationality would be listed as “China.” That designation occurs for a Taiwanese student coming to Denmark or a Danish citizen arriving in Denmark with, for example, their Taiwanese partner. Details of this were published on Sunday in an article in the Danish daily Berlingske written by Alexander Sjoberg and Tobias Reinwald. The pretext for this new practice is that Denmark does not recognize Taiwan as a state under
The Republic of China (ROC) on Taiwan has no official diplomatic allies in the EU. With the exception of the Vatican, it has no official allies in Europe at all. This does not prevent the ROC — Taiwan — from having close relations with EU member states and other European countries. The exact nature of the relationship does bear revisiting, if only to clarify what is a very complicated and sensitive idea, the details of which leave considerable room for misunderstanding, misrepresentation and disagreement. Only this week, President Tsai Ing-wen (蔡英文) received members of the European Parliament’s Delegation for Relations