[Reader-list] Sell your dollars

[Rana Dasgupta]

this is condensed version of article in newsweek about american debt and the
dollar.

there has been an argument floating around that the US is interested in
fighting iraq mainly in order to ensure that it does not decide to switch
its oil economy over to the euro and so threaten the delicate balance by
which the issue of the US' massive debt is kept at bay - and as a warning to
others (eg Iran, Syria) who have spoken of doing the same.  this argument is
also used to explain why the eurozone countries are so against the war.
britain and australia of course are not euro countries.  this argument is
outlined here:

http://www.pressurepoint.org/pp_iraq_why_now.html

this article gives slightly more nuanced account.  the problem is massive
for america - but the cost of war is equally problematic...

R


The Unmighty Dollar

A costly war could drive more foreign investors away from the United States,
hurting living standards and our influence abroad

By Clyde V. Prestowitz Jr.
NEWSWEEK

March 24 issue

As America prepares for war, all eyes are fixed on the capabilities of its
troops and high-tech weapons. Less noticed is an Achilles’ heel that is
likely to be made a lot more tender by the war, with important negative
implications for future U.S. living standards - and influence.

WHILE THE UNITED States is the greatest power the world has ever seen, it is
also the greatest debtor, living beyond its means and heavily dependent on
foreign lenders. For years America has been importing more than it exports.
These current account deficits have now reached an annual rate of $500
billion, or about 5 percent of GDP and 50 percent more than the United
States spends on defense. America has been paying for the difference by
borrowing. In this case, the money has to come from foreign lenders because
the buying that generates the deficits is done abroad. The debt America owes
abroad has now reached about $2 trillion, or about 20 percent of GDP. At its
current growth rate, total U.S. foreign debt could easily top 65 percent of
GDP by 2010. Even with interest rates of only 3 percent, it would take
nearly $200 billion annually for the United States simply to finance the
debt.

The deficit ultimately arises because America saves far less than other
countries, and the war is about to make that situation a lot worse.
Economist Martin Wolf has conservatively estimated the cost of the war and
of rebuilding Iraq over a 10-year period at $156 billion to $755 billion.
Other estimates have run as high as $3 trillion. In the 1991 gulf war, most
of the cost was paid by other countries. This time, the United States will
have to bear most of the burden itself. Without new taxes, this will greatly
increase the U.S. budget deficit.

For a long time it has been relatively easy to get the foreign funds as
overseas investors have rushed to buy U.S. stocks, bonds, real estate and
companies. During the tech bubble of the 1990s America became the location
of choice for investors from countries with large international reserves,
such as China, Taiwan, Japan and Western Europe. The flood of money buoyed
the dollar and stocks, allowing Americans to live beyond their means by
consuming more than they produced.

More recently, however, there has been a significant change in the flow of
the foreign funds that is as critical to U.S. economic health as the flow of
oil. Over the past year, private foreign investment in the United States has
fallen dramatically. It has been partially offset by increased buying of
U.S. Treasury notes by Asian governments. But, at the same time, some
governments like Russia have also begun to shift some of their reserve
currency holdings from dollars to euros. As a result, we have seen the
dollar fall in value against the euro by about 25 percent. That kind of a
decline occurs when foreigners decide to put their money someplace other
than the United States. U.S. international debt is getting so large,
foreigners become nervous about their holdings and cut back on buying.

Thus, the biggest casualty of the upcoming war with Iraq may be the U.S.
economy. A dramatic increase in debt could result in a fall of the dollar
that would reduce U.S. living standards while significantly increasing the
cost of projecting U.S. power abroad. The only way to avoid this scenario is
by raising taxes, something that will also reduce living standards. Another
option is to become more dependent on lenders like China and Saudi Arabia.
Either way, U.S. power may not loom nearly so large as many now imagine.


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Prestowitz is president of the Economic Strategy Institute and author of the
forthcoming book "Rogue Nation."