Financing of US debt not sustainable: report
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.
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