Originally published February 24, 1986
AT SOME POINT recently, the United States crossed a great divide. Rather, we re-crossed the divide and became again a debtor nation, as we were until 70 years ago, owing more to the rest of the world than the rest of the world owes us. We owe so much, as a matter of fact, and our debts are piling up so fast, that very shortly we may become the world’s largest debtor, surpassing Brazil, the present leader.
Mention of South America’s biggest country causes our hearts to miss a beat. Only a decade ago our financial wise men were ecstatic about the Brazilian GNP and jostled each other in their eagerness to press our savings on the Brazilian government, on Brazilian entrepreneurs and on conspicuous Brazilian consumers. There’s no need to detail what happened. Will the same thing happen to us?
Our hearts must miss another beat when we reflect on the British, our creditor until World War I and an overall creditor for another decade. But in World War II they crossed the divide from general creditor to general debtor, and coincidentally entered upon a downward slide whose end is not yet. Does a similar fate await us?
Foreign debts-like national or even personal debts-come about in different ways that can have different effects. Since, as I never tire of saying, economics is not a natural science, the effects are not invariant nor, especially, are they invariably benign (or malign).
The most obvious source of foreign indebtedness is an unfavorable trade balance on current account. This means, merely, that we buy abroad more than we sell there. As a result, we increase our stock of capital goods (machine tools, for example, or knitting machines) and our supply or flow of consumer goods (automobiles or sports shirts). That is good, for it increases our common wealth and has a moderating effect on our inflation.
The moderation is achieved by substituting cheap foreign goods for expensive domestic goods. The domestic goods are expensive because our wages are relatively high. Foreign competition forces our prices down, which forces our wages down or, more usually, forces some of us out of work. That is not so good, though it is remarkable how steadfast our editorialists and economists are in the face of this outcome. (It would not be nice to suggest their steadfastness is strengthened by the fact that neither newspapers nor economics departments face foreign competition.)
Whatever its impact, an unfavorable balance on current account can continue as long as foreign sellers are willing to extend us credit. Of course, we must also be willing to buy. In both cases, the willingness is reinforced by (or is a sign of) the “strength” of the dollar. Our currency is strong (that is, attractive to foreigners) because our interest rates are high and our society is large, open and comparatively stable. Thanks to our size, there are a lot of dollars around, and practically all of our foreign sales and purchases and borrowings are in terms of dollars. Therefore, we are the masters of our fate; we (well, the Federal Reserve Board) set the terms of our trade.
Of course, the dollar can lose its strength, too. Indeed, we had a weak dollar not that long ago. This weakness was not of a piece with President Carter‘s alleged wimpishness; it was deliberately induced by President Nixon‘s alleged machismo. A weaker dollar means lower purchases and higher sales abroad, with both consequences producing higher employment and, probably, higher prices at home. No one really knows the extent of the consequences, but they can be handled, for there is very little we absolutely have to buy abroad: bauxite and a few such things that we don’t have, oil and a few such things that we’re too self-indulgent to manage properly, coffee and a few such things that are enjoyable yet hardly necessary. In short, since our national existence is far from dependent on foreign trade, we are not threatened by that part of our foreign indebtedness that is caused by the imbalance on current account.
The next most visible category of our foreign indebtedness consists of foreign purchases of U.S. government bonds (part of the capital account). Federal Reserve Board Chairman Paul A. Volcker considers he purchases important perhaps vital-in financing the Federal deficit. Without them, he argues, much less money would be available and the interest on government bonds would be much higher than it is. Moreover, the government would crowd private industry out of the money market. Businesses unable to afford the high rates would fail; even successful businesses would have to reduce operations-in other words, fire people. The quantity of money, however, is controlled by the Fed itself (at least the Fed thinks it is), making you wonder who is doing what to whom, and why.
In any case, we seem to have some sort of reason to be grateful for foreign purchases of our bonds. It’s pleasant to see that money coming in, but then the interest money has to go out, and the rate has to be high to induce people to buy the bonds. What do foreigners do with the dollars we pay them?
Well, the dollars can be used to buy American goods, whereupon our prices will tend to rise, the dollar will tend to strengthen, and we will have to sell them less for their money. Alternatively, they can use the dollars to buy their own currencies, whereupon the dollar will tend to fall, and we will be able to sell more goods abroad and to import less.
Now, that is very curious: The results are contradictory, yet both are largely favorable. There are two explanations, and I can only hint at them in this space. The first and more obvious one is that very few, if any, economic policies are all good or all bad-an unexampled blessing-and we are here accentuating the positive. The second and more important explanation is that our economy- faulty as it surely is-is more liberal than most of those of the rest of the world. That is to say, in the United States whatever is to the benefit of one class is likely to have some benefit for everybody. It is more nearly true that whatever is good for General Motors is good for America, I am suggesting, than that ours is a zero-sum economy. All workers are consumers and so benefit from low prices, and most consumers are workers and so benefit from high wages. If more American consumers had good jobs it would be better for all of us.
The third most visible category of our foreign debt involves investment in U.S. industries. Foreigners have played our stock exchanges and commodities markets for years. Major chunks of U.S. real estate-New York’s Pan Am building, for example-are foreign owned. Volkswagen had a U.S. assembly plant decades before Toyota and General Motors settled on their new joint venture. Foreign ownership has gone so far in Vermont that the state has now put obstacles in’its way. At first glance all this looks as though we were being colonized by foreigners. Is it really our fate to recapitulate Brazil’s experience?
The significant difference between Brazil and the U.S. is that foreigners invest their own currency in Brazil and take their interest out in their own currency, while their investments and returns in the United States are in United States currency. Foreigners can do with their income from U.S. investments what they do with their interest from U.S. bonds, and the consequences for us are the same. Foreign investment is not bad per se. To the extent that it provides jobs, it is good. To the extent that it produces goods for use in the producing country, it can be good. But to the extent that it is extractive, it is bad (see “The Wages of Exploitation,” NL, August 8-22, 1983).
BRAZIL and the rest of the Third World are choking to death on the rich loans we have fed them because their societies cannot now digest the kinds of investments we have urged on them (see “Starving All the Way from the Bank,” NL, May 6-20, 1985). To dramatize the problem, consider the Democratic Republic of Madagascar, a nation of some 8.7 million souls occupying 226,658 square miles. Suppose the Gallup Poll went into Madagascar and asked the people if they would like to have an automobile. You know they would answer in one voice, “You bet!” Conservatively, there is an abstract Madagascarian demand for 3 million automobiles-enough to support a fully diversified, computerized, robotized industry. Sweden has almost the same population on only 173,665 square miles, and seems to do pretty well in the automobile business. Why shouldn’t Madagascar get cracking?
We could list reasons from here to breakfast, and they would come down to one word (system) and to one fact (a system is not built in a day). The moral is this: Because of our system, international indebtedness does not have the same consequences for us (or for Sweden) as it may have for the Third World.
The heart of our system is us-we the people. I don’t mean that we’re a national resource, as conservatives of good will like Milton Friedman would have it. I mean that we are the nation. We could be a better nation. More of us could participate in the pleasures, the excitements, the excellences that some have discovered or developed. The shame of the Reagan Administration is that it has, at every turn, reinforced exclusion and resisted participation.
When it, too, has passed away, we’ll be left with that mountain of foreign debts. They will still be denominated in dollars and so under our control. This does not assure that we will control them wisely. If the Federal Reserve Board continues to manage the money supply instead of the interest rate (or try to), if our financial markets continue to be absorbed in takeovers and mergers, if our tax laws continue to reward speculation, then it is quite possible that our foreign debts will drain the enterprise out of our system. Britain is only the shell of her former greatness. It could happen here. But the danger is not in our stars, nor is it in indebtedness as such.
The New Leader