Exporting Dollars and Financial Crises
- By Alexei Bayer
- Sep. 22 2008 00:00
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The U.S. economy is a formidable machine, leading the world in technological innovation and inundating it with pop culture. But for all its exports, the United States consumes much more than it produces. Its current account deficit, at around $850 billion, equals 1.2 percent of the goods and services produced by the entire global economy.
The U.S. government and its consumers all overspend. The only way they both can get away with spending more than they earn is by borrowing. Over the past eight years, U.S. consumer debt, for instance, has ballooned by $6 trillion, which comes to $750 billion in net new borrowing each year.
The financial sector has been a major facilitator of this borrow-and-spend spree. The Federal Reserve, which kept U.S. interest rates too low over the past 15 years, helped lure Americans to borrow beyond their means. Financial wizards on Wall Street have been inventing complex financial instruments so that U.S. households could squeeze every last dollar from every asset they own. They helped millions of Americans transform their homes into ATM machines. Wall Street has securitized so much consumer debt that when the economy hiccupped, its leading financial firms promptly went under. The casualty list that includes Bear Stearns, Fanny Mae, Freddy Mac, Merrill Lynch, Lehman Brothers and AIG is likely to grow.
Success has 100 fathers, whereas failure is an orphan. But the spectacular financial crisis we are seeing today has many other fathers, including many abroad. The United States has become a commodity exporter, but instead of oil it exports trillions of dollars. It has been exploiting the dollar's status as a reserve currency, and the rest of the world has been more than willing to go along, accepting dollars in exchange for commodities and goods.
China is now sitting on a pile of Central Bank reserves worth nearly $2 trillion (or 3 percent of global gross domestic product). This is mostly the money it lent to the United States over the past decade so that U.S. consumers could continue to buy its manufactured goods. China has used those dollars to develop its industry and infrastructure and pull millions out of poverty. It may now suffer an overproduction crisis, but at least it has something to show for it. Russia presents a far more deplorable case.
For all the anti-U.S. rhetoric coming out of the Kremlin, Russia has emerged as a full partner of the American consumption spree. Russian oil output has jumped by about 4 million barrels per day over the past decade. It now vies with Saudi Arabia as the world's top oil producer. Meanwhile, U.S. oil consumption has risen by 2 million barrels per day. The United States burns more oil than the Russians and the Saudis jointly pump. Also, Moscow has been lending Washington money to keep importing oil, as evidenced by the rise in its Central Bank and stabilization fund holdings from virtually nothing to $750 billion.
And despite their Cold War-like squabbling, the two commodity-exporting countries are becoming quite similar. They boast the largest number of billionaires, together accounting for 50 percent of the world's total. Moreover, the gap between the rich and the poor in both countries is vast and growing.
The one difference is that Russia, like most other oil exporters, has an autocratic government with a charismatic strong man at the top, whereas the United States still clings to its democracy.
Hopefully, this financial debacle has come just in time to save the United States from sharing Russia's political fortunes.
Alexei Bayer, a native Muscovite, is a New York-based economist.