[A-List] Destructive creation:US economy's internals

[Rob Schaap <rschaap@xxxxxxxxxxxxxx>]

Absolutely beaut article:


June 13, 2002
Financing of US debt not sustainable: report
http://business-times.asia1.com.sg/news/story/0,2276,48094,00.html
Reversal of capital inflows into US from Asia could precipitate a crisis
By  Siow Li Sen

                          (SINGAPORE) The United States, by far the
largest indebted nation in the world, is being bankrolled by thrifty
Asian savers like Japan, China and Singapore. But this is unsustainable
and a threat to financial stability, says a report by the New Economics
Foundation (NEF), a radical UK think-tank.

                          Savings trends in Asia will decline as its
middle classes consume more and a reversal of capital inflows into the
US could precipitate a financial crisis or a sudden crash like in
Thailand or Mexico.

                          Asian consumers
                          will spend more
                          and borrow more
                          over the next
                          decade, and its
                          savings rates will
                          come down to
                          European or US
                          levels, says the
                          report. It suggests
                          this has already
                          started: in January
                          this year, Japanese
                          investors made their
                          largest net sales of
                          foreign bonds in
                          four years - US$24
                          billion.

                          One of the NEF's
                          programmes
                          focuses on the
                          debts of the poorest
                          countries and the
                          economic adjustments imposed on them by
creditors. Its report - which calls the US a HIPC or 'heavily indebted
prosperous country' - was publicised to coincide in April with the
International Monetary Fund and World Bank spring meetings in
Washington.

                          The US, with a population of 300 million, has
accumulated an external debt of US$2.2 trillion, almost the same owed by
about five billion people in the whole of the developing world,
including India, China and Brazil - US$2.5 trillion.

                          Put another way, every American citizen owes
the rest of the world US$7,333 while every citizen of all the developing
nations owes only US$500.

                          More disturbingly, the US debt is also
financed by the poor countries through capital flight from the latter
and the forced holdings of high levels of US dollar reserves, the report says.

                          Poor countries are borrowing at interest rates
as high as 18 per cent, while the US borrows through US Treasury bonds
at 3 per cent. Continued inflows of capital into the US and UK help to
lower interest rates and also inflates the value of their currencies by
about 20 per cent. This enables them to buy imports from the rest of the
world 20 per cent cheaper than they would otherwise have been able to,
the report argues.

                          Poor countries are bled dry through debt
service repayments totalling more than US$300 billion a year while the
US needs to pay only US$20 billion annually to service an almost
equivalent debt.

                          Whether the US deficit is reversed through a
sudden crash or a continued decline, 'it is inevitably the poor
countries that will bear the highest costs of any correction to the US'
unsustainable debts'.

                          The hard-hitting report adds: 'While the
growing deficits of rich countries are not understood, are ignored or
tolerated by academics, experts and public opinion, the debts of poor
countries are the subject of much opprobrium.

                          'Rich countries are held to be prudent,
efficient and competent in managing their economies - and therefore
'deserve' their historically high, extravagant and environmentally
unsustainable living standards. In contrast, poor countries are judged
as incompetent and corrupt in managing their finances - a fact which is
seen to explain the huge 'quantities' of poor country debt.'

                          Another of its controversial claims is that
the US deficit is the real driving force behind globalisation. 'Elected
representatives of the US and the United Kingdom have actively promoted
international financial liberalisation, or 'globalisation', to finance
the US deficit,' it states. It argues that globalisation has not been
primarily driven by corporations or by development in new technology.

                          Instead, because of the need to finance the
steady expansion of the US trade deficit in the 1960s and 70s, the US
and UK governments embarked on a deliberate policy to remove statutory
controls over the movements of capital.