Economic downturns sell. That’s certainly no secret to the financial media, the better part of which has been forecasting a scenario for the demise of the U.S. dollar for more than two years now. It’s a chronicle that’s been told and retold, recycled through headlines and polished for cover pieces. The conventional template, (give or take some data and a stale metaphor or two), reads something like this: The U.S. economy, thanks to record-low private saving rates and a spendthrift federal government, has dug its deepest financial hole since the Great Depression. There’s no arguing with that. The United States, far and away the world’s most prominent debtor, is now in the heat of a decade-long borrowing binge. The current account deficit — the difference between what U.S. residents earn and spend abroad in a given year — at 6 percent of GDP, has drifted into uncharted territory.
- Jess Cox
From there, the story gets bleaker. Your typical dollar disbeliever will go on to question the sustainability of the U.S. debt burden; in particular, the willingness of our oversees creditors to bankroll it. Asian monetary officials are losing patience, the argument follows, and pressures to diversify their currency reserves are intensifying. Pop in a paragraph about the mounting strength of the Euro, sprinkle on a few colorful catch lines — “currency crisis,” “economic catastrophe” — and out comes a front-page attention-grabber.
Anyone who’s anyone in the financial media has published it. The Wall Street Journal, The Financial Times, Barrons — pick your paper — the dollar doomsday scare has seen its time above the fold. I swallowed the pill myself. Just last November, in between these very margins, I too was clamoring about the growing likelihood of a capital flight from Asia. In hindsight, it’s not difficult to understand how the dollar has managed to carry its own weight. Caught up in a media frenzy, it’s easy to forget why Asian central banks line up to finance our debt in the first place.
Ever since their devastating experiment with overpriced currencies in the late 90’s, Asia’s emerging market economies have found solace in the full faith and credit of the U.S. Treasury note. It’s simple give-and-take: By padding their pockets with trillions in dollar-denominated debt, Asian governments can keep their currencies competitively priced below the greenback. This keeps exports cheap and ensures the dollar stays healthy enough to purchase them. Central banks stomach the IOUs while manufacturers, blessed with a marked-down currency, continue to turn out their sports cars, VCRs and whatever else it is they produce down there. As for us, well, we get to keep spending. With the unforgiving nature of Asia’s export markets, developing economies in the region have no choice but to feed the dollar’s appetite — currency appreciation is simply not an option.
Before Asia’s late bloomers can even dream of abandoning the dollar-debt cycle, capital markets will have to mature, and income disparities will have to be met head on. Consider China. With almost a quarter of its billion-plus population confined to rural peasantry, any serious de-emphasis on export-led growth would rob countless citizens of a primary source of income. If the Chinese government (or any of its up-and-coming Asian cousins) were to chance a premature experiment with a steeper currency, I assure you, the price of the dollar would be the least of our worries.
Even if Asian banks wanted out, where could they go? Europe, the all-to-predictable response, seems reasonable from a foreign exchange standpoint. For its expensive asking price, the Euro offers relatively steady growth in a deep trading market. But if I’m a central bank in Asia, responsible for finding a safe home for the bulk of my currency reserves, shacking up with the Euro simply won’t get me very far.
The pace of European Union expansion has shaken the international investment community. Spanning from Sweden to Slovakia, the E.U.’s trading zone may have grown too stocky for its own good. Capital markets have yet to be coherently integrated, and the absorption of sinking economic ships like Latvia and Lithuania has deflated growth projections. Even with the expansion of the Eurozone, the International Institute of Economics still projects that by 2020, the U.S. economy will be 20 percent larger than the European Union’s.
Any way you look at it, the United States remains the 21st century’s most promising engine of economic growth. Annual productivity gains have complemented a healthy labor force and a vigorous entrepreneurial spirit to make the U.S. economy the world’s perennial leader in the innovation and application of new technology. A transparent legal system, general political stability and the planet’s most elaborate financial sector haven’t hurt either. But don’t take my word for it — look at the numbers.
The U.S. still sits atop the money list of foreign direct investment — long-term capital flows that grant foreign holders partial control over their assets — funds that are not factored in to our current account balance. U.S. enterprises saw $43 billion in FDI in the first half of 2004 alone — that’s more than 2003’s total inflow. What’s it signify? Confidence. More than anywhere else in the world, foreign investors want their cash in the U.S. business sector, be it a music studio in Manhattan or an oil refinery in Houston. It’s an unambiguous symbol of staying power — both for the United States’ businesses and its currency — a dagger to the heart of any dollar doubter.
Singer can be reached at singers@umich.edu.