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Will America lose its AAA credit rating?
By Eduardo Porter
The New York Times
Sunday, June 5, 2005
http://www.nytimes.com/2005/06/05/business/yourmoney/05view.html?
th&emc=th
Guess who's paying for America's spending binge -- for the
ballooning credit card bills, the scramble for homes, the country's
gaping budgetary hole.
Poor countries have become the financiers of the United States,
fueling one of the most extravagant consumption drives in world
history.
From 1996 to 2004, the American current account deficit -- which
includes the trade deficit as well as net interest and dividend
payments -- grew to $666 billion from $120 billion, swelling the
nation's demand for foreign financing by $546 billion.
The cash has come mostly from what the International Monetary Fund
defines as emerging markets or developing countries -- nations that
have piled up mountains of cash even though most of their citizens
are poor. High on the list is China, whose per-capita gross domestic
product of $1,300 last year was a thirtieth that of the United
States. Others are Russia, where GDP per head was $4,100, and India,
where it barely topped $600.
The current accounts of developing countries swung from a deficit of
$88 billion in 1996 to a surplus of $336 billion last year -- a $424
billion change that has covered some four-fifths of the increase in
the deficit of the United States.
This pattern troubles some policy makers in the United States. In
speeches in March and April, Ben S. Bernanke, the Federal Reserve
governor nominated by President Bush to be chief economic adviser,
argued that a main reason for America's swelling external deficit
is "the very substantial shift in the current accounts of developing
and emerging-market nations, a shift that has transformed these
countries from net borrowers on international capital markets to
large net lenders."
The poor-country money, Mr. Bernanke said, pushed the current
account of the United States deeper into the red. As the money
arrived, it first lifted stock prices, encouraging both consumption
and investment. When stocks tanked, it moved to the bond market,
fueling the housing boom and yet more spending.
There's nothing inherently wrong with taking money from poor places;
it's not as if the United States is stealing it. Developing
countries are providing the funds willingly.
But it is rather odd. Conventional economic thought suggests that
funds should flow the other way. Capital-rich industrial nations
like the United States, where workers already have a large stock of
capital goods to work with -- like high-tech factories and advanced
information technology networks -- should be sending money to places
rich in labor but with a meager capital stock.
Developing countries, of course, use this money to grow out of
poverty, investing in their own factories and schools. And precisely
because capital is scarce and labor abundant, money invested in
these countries should achieve a higher return.
"For the developing world to be lending large sums on net to the
mature industrial economies is quite undesirable as a long-run
proposition," Mr. Bernanke said.
So what's going on?
The efforts of China and other developing countries to keep their
currencies from rising against the dollar help explain why the flow
of global money is trumping conventional wisdom. Yet other forces
are at play. The climb in oil prices, for one, has produced big
gains for countries like Nigeria, Russia, and Saudi Arabia, which
have put much of the cash in dollar assets.
Most important, running a current-account surplus has become a
matter of self-defense throughout the developing world.
Many of the poor countries that are now lending money to richer ones
previously were big borrowers and spenders themselves. Then they
were hit by a series of financial crises. Starting with the currency
collapse in Mexico in 1994 and continuing with the Asian currency
crisis of 1997, the Russian debt crisis of 1998, the Brazilian
currency devaluation of 1999, and the Argentine default of 2002,
developing countries experienced large-scale capital flight, which
forced painful devaluations and sharp economic contractions.
Naturally enough, they took measures to reduce the chance of further
jolts. Countries stricken by crisis or just trying to avoid it
tightened their belts. They stimulated exports and inhibited
imports -- working to keep their exchange rates low. They reduced
domestic investment and paid down foreign debt.
And they amassed vast foreign reserve warchests to protect
themselves in case investors ever decided to bolt again and take
their capital with them. Russia's international reserves, for
instance, mushroomed to $124 billion at the end of 2004 from $18
billion at the end of 1997. India's jumped to $126 billion from $24
billion over that period.
Last year alone, according to the Institute of International
Finance, a lobby group of big banks, international reserves of
developing countries grew nearly $400 billion.
The good news for the United States is that these forces are
unlikely to change direction imminently. In an interconnected world,
where investors can move billions across oceans at the touch of a
button, these countries have little reason to shift strategies.
Guillermo Calvo, the chief economist of the Inter-American
Development Bank, who has seen his share of financial crises in
Latin America, put it succinctly: "Every country seeks more
security. The only thing they can do is build up their warchest."
The United States gets to spend it.
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