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Journalism of Courage
During the 1990s I spent much of my time focusing on economic crises around the world 8212; in particular, on currency crises like those that struck south-east Asia in 1997 and Argentina in 2001. The timing of such crises is hard to predict. But there are warning signs, like big trade and budget deficits and rising debt burdens.
And there8217;s one thing I can8217;t help noticing: a third world country with America8217;s recent numbers 8212; its huge budget and trade deficits, its growing reliance on short-term borrowing from the rest of the world 8212; would definitely be on the watch list.
Okay, let8217;s run through some reassuring counterarguments. First, economists are very good at devising models that would have predicted past crises, but each new crisis tends to happen where and when they didn8217;t expect it. So even though our budget deficit is bigger relative to the economy than Argentina8217;s in 2000, and our trade deficit is bigger relative to the economy than Indonesia8217;s in 1996, our experience needn8217;t be the same.
Second, nasty crises in third world countries have a lot to do with the fact that their debt is in foreign currency, usually dollars. As a result, when the peso or the rupiah plunges, debts explode while assets don8217;t, and balance sheets collapse. By contrast, thanks to the special international role of the dollar, America8217;s burgeoning foreign debt is in our own currency.
Finally, financial markets are generally willing to give advanced countries the benefit of the doubt. Even when an advanced country seems to be deep in a financial hole, lenders usually assume that it will somehow find the resources and political will to climb back out.
So is America safe, despite its scary numbers?
Third world countries typically suffer from institutional weaknesses. They have poor corporate governance: you can8217;t trust business accounting, and insiders often enrich themselves at stockholders8217; expense.
Meanwhile, cronyism is rampant, with close personal and financial links between powerful politicians and the very companies that benefit from public largesse. Luckily, in America we don8217;t have any of these weaknesses. Oh, wait. Isn8217;t that all history? No. According to The Wall Street Journal, we are again hearing warnings that 8216;8216;optimism is based on massaged earnings8217;8217;.
Still, there8217;s no question that the United States has the resources to climb out of its financial hole. The question is whether it has the political will.
There is now a huge structural gap 8212; that is, a gap that won8217;t go away even if the economy recovers 8212; between spending and revenue. For the time being, borrowing can fill that gap. But eventually there must be either a large tax increase or major cuts in popular programmes.
If our political system can8217;t bring itself to choose one alternative or the other 8212; and so far the commander in chief refuses even to admit that we have a problem 8212; we will eventually face a nasty financial crisis.
The crisis won8217;t come immediately. For a few years, America will still be able to borrow freely, simply because lenders assume that things will somehow work out.
But at a certain point we8217;ll have a Wile E. Coyote moment. For those not familiar with the Road Runner cartoons, Coyote had a habit of running off cliffs and taking several steps on thin air before noticing that there was nothing underneath his feet. Only then would he plunge.
What will that plunge look like? It will certainly involve a sharp fall in the dollar and a sharp rise in interest rates. In the worst-case scenario, the government8217;s access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos.
I know: it all sounds unbelievable. But would you have believed, three years ago, that the budget would plunge so quickly from a record surplus to a record deficit? And would you have believed that, confronted with that plunge, our leaders would offer excuses rather than solutions?
New York Times
