The volume of US debt has overtaken the size of the American economy. Within the next 18 months the debt figure is expected to rise to approximately seventeen trillion dollars. The bipartisan agreement on raising the debt ceiling by two and a half trillion dollars was conditional on spending cuts of similar magnitude over the next ten years. The implications of self imposed thrift on a struggling economy are self evident. Reduced public expenditure will generate greater unemployment, already ominously high, curtail consumer spending which would directly impact production and output. It would also lower demand for imported goods. In a queer twist, down the line, the world may well yearn for the return of American profligacy to sustain its economic growth.
Voices of criticism of America’s “debt addiction” occasionally mixed with joy at the plight of a blundering superpower were heard from around the world. What was forgotten was the fact that the ability of the US for further borrowing was never in question. The crude political wrangling that preceded the deal was mere delay. Political failure was confused with the strength of the US economy whose resilience is evident from the fact that in the midst of the widespread chorus of doom not a single treasury bond was cashed by a foreign holder including America’s loudest critics.
Let us for a moment put aside US foreign policy objectives including, in particular, the naked militarism in its approach to international relations. Let us instead focus on the impact of the debt-ridden American economy on global prosperity.
A Chinese newspaper had described the US debt as “immoral” and its officials had reprimanded US lawmakers for the political charade that had preceded the debt ceiling agreement. China’s concern over the crisis was justified having invested more than a trillion dollars in US government securities. It is the largest foreign holder of these instruments, its share having increased from 6 percent in 2000 to 27 percent in 2010.A bankrupt federal government, unable to meet its international financial obligations, would have adversely impacted the huge Chinese investment in American treasury bonds and its other dollar denominated holdings accounting for more than sixty-five per cent of its reserves.
China’s spectacular economic growth is justifiably quoted as offering the ideal route to prosperity. Its gradual, organised and controlled opening up to and integration with the global economy allowed mass uplift without the type of disruptions which accompanied Russia’s embrace of capitalism. Within three decades, China achieved the unthinkable goal of extricating tens of millions of people from the clutches of poverty. Here the question poses itself: how much of this achievement, in addition of course to wise government policies and the industriousness of the Chinese people, was occasioned by favorable external factors? The following figures, in billions of dollars, indicating China’s imports from and exports to the US are instructive:
In the year 2001, Chinese imports from the US were 19 billion dollars while its exports were 102 billion dollars leading to a surplus of 83 billion dollars in that particular year. Chinese imports had climbed upto 92 billion dollars and its exports to 365 billion dollars in 2010! While its surplus was 83 billion dollars in 2001, it stood at 273 billion dollars in 2010. From 2001 to 2010, Chinese imports totaled 496 billion dollars while its exports to the US totaled at a whopping 2424 billion dollars leading to a surplus of 1928 billion dollars over a decade!
Evidently, during the past ten years China has reaped a trade surplus of close to two trillion dollars vis-à-vis the United States. Approximately half of this money was funneled back to the US economy to purchase interest bearing bonds. These investments would not have been possible without the gigantic surpluses created by the “profligate” American consumer in complicity with an “imprudent” federal government.
During the past decade, American companies have made direct foreign investments in China to the tune of forty billion dollars in twenty thousand odd projects. In 2010, General Motors sold more cars in China than at home. According to some impartial studies, since 1998, as a consequence of relocation and outsourcing the US economy has shed 3.4 million jobs of which 1.3 million are reported to be tied to China. These losses however need to be seen in the context of the enormous benefit to the American consumer due to the availability of cheap Chinese products.
How much impact these surpluses and US investments have had in promoting economic empowerment in China and elsewhere and how much these had contributed to lifting vast segments of populations out of poverty should be a subject of considerable interest.
This is certainly not an attempt to justify American fiscal imprudence. Injection of serious discipline in the world’s largest economy is essential for balanced global growth. Yet it would be inadvisable to confuse political myopia with US’s economic condition. Just the simple step of letting the Bush era tax cuts for the wealthiest Americans to lapse would create a significant dent in the deficit. Political skullduggery is equally to blame.
Countries that have invested heavily in dollar denominated instruments are perfectly within their right to assure themselves of the security of their assets but their governments should not be averse to occasionally reminding themselves of the sources of the wealth which made these purchases possible in the first instance.
The writer is Pakistan’s former Ambassador to the United Nations and European Union. He can be contacted at shaukatumer@hotmail.com