Please, Lend Us Less

Foreigners have snapped up more than a trillion dollars’ worth of U.S. government debt, but if you ask why, you’ll discover more bad news than good

Oct. 1 — Someone recently noticed that foreigners have invested heavily in U.S. Treasury securities—so much so that their money covers the cost of the war in Iraq and much of the exploding U.S. budget deficit. In the first half of 2003, foreign purchases of U.S. Treasury notes and bonds totaled $265 billion. The cumulative foreign holdings of federal debt amount to about $1.35 trillion, or a hefty 36 percent of the publicly held debt. It appears that Americans can have their cake (high government spending, low taxes) and eat it too. Foreigners will pick up much of the tab.

Well, no. Up to a point, this was true, but we have passed that point. The harsher truth is that foreigners’ voracious appetite for U.S. treasuries reflects deeper problems of the world economy that, in turn, harm the American economy. About 60 percent of this year’s foreign purchases of federal securities have come from private buyers (pension funds, insurance companies, corporations, wealthy individuals) and the remainder from government agencies (mainly central banks—other countries’ federal reserves). If you ask why they like U.S. treasuries, you discover more bad news than good.
Start with private investors. One reason they invest here is that they lack good investment opportunities at home. During the 1990s they concentrated on stocks and bonds, contributing to the stock “bubble.” Now some funds have skirted into safer Treasury securities. What’s unchanged is that economies abroad, particularly in Japan and Europe, haven’t been sufficiently dynamic to justify investing those funds at home. The appeal of American investments is more an indicator of their weakness than our strength.
The trouble is that their weakness boomerangs on us. Together, Europe and Japan represent almost a third of the global economy, reports the International Monetary Fund. If these economies are feeble, the demand for U.S. exports may be feeble. And so it’s been. From 2001 to 2003, Japan’s economy grew a pitiful 0.5 percent a year; the rate for “euroland” (the countries using the euro) was barely better at 1.1 percent. With stronger economies abroad, the American recovery would have been stronger.
Now turn to central banks. They invest in U.S. Treasuries because they have surplus dollars. They have surplus dollars because, typically, their countries run trade surpluses. To maintain those surpluses, governments intervene in foreign exchange markets; they buy dollars with their own currencies. The purpose: keep their currencies cheap compared with the dollar—and thereby make their exports more competitive. Asian nations have been especially aggressive in pursuing trade surpluses through this strategy. Since 1996 the foreign exchange reserves (held heavily in dollars) of China, Japan, Taiwan, Hong Kong and South Korea have leaped from $500 billion to $1.3 trillion. Central banks could invest their dollars in anything—U.S. stocks, corporate bonds or real estate. But governments favor Treasuries for safety and “liquidity” (they can be bought and sold easily).
Again, the U.S. economy now suffers. The artificially depressed level of many Asian currencies undermines the competitiveness of American exports while making Asian imports cheaper. Pressure increases on U.S. companies to shift production abroad. Economists at Goldman Sachs recently estimated that overseas “outsourcing” of all sorts has cost the U.S. economy 300,000 to 500,000 jobs in the past three years. Unsurprisingly, U.S. manufacturers are screaming for China and other Asian countries to revalue their currencies, and Treasury Secretary John Snow echoes their demands. (Indeed, last weekend Snow pushed again for stronger foreign currencies.)
Concerning the United States, the language of global finance is backward. It is said that we “borrow” abroad and “need to attract foreign capital.” In truth, foreigners are eagerly lending to us, mainly for their own reasons. In an accounting sense, their lending covers a big part of the U.S. budget deficit. But in ways that matter more—in an economic and social sense—their lending costs us, because it reduces domestic production and employment in the United States. Some Americans gain from inexpensive imports, while others lose through eliminated jobs and reduced profits.
This was not always so. The dollar plays a unique role in the global economy. It serves as the world’s main