[Paleopsych] NYT: Another Drink? Sure. China Is Paying.
checker at panix.com
Sun Jun 5 16:02:51 UTC 2005
Another Drink? Sure. China Is Paying.
New York Times, 5.6.5
By EDUARDO PORTER
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 G.D.P. 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
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 war chests 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
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 war chest." The United States gets to spend
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