Stephen S. Roach: So Much for the Kindness of Strangers
Washington overlooked a critical issue in the deficit and debt debate: Global imbalances are a key aspect of the problem. They must be addressed if the U.S. is to put its fiscal house in order.
The global connection is underscored by America's voracious appetite for foreign credit. Overseas investors now hold about $4.5 trillion, or 48%, of all U.S. Treasury securities. In late 2008, China surpassed Japan as America's largest foreign lender; it now accounts for nearly 30% of Treasuries owned overseas.
America's addiction to foreign capital did not emerge out of thin air. It stems from a chronic shortfall of saving — an imbalance that was deeply embedded in a culture of excess and bubbles. Aided and abetted by reckless policies, Americans became convinced that open-ended housing appreciation was a permanent source of wealth. Consumers no longer relied on the income they earned at their jobs to produce their retirement nest eggs and emergency accounts. Instead, they became hooked on credit and the ability to extract purchasing power from the housing bubble.
Lacking in saving, the U.S. borrowed other nation's surpluses in order to keep growing. That's where China came into play: it was the economy with the biggest imbalance on the other side of the equation.
The excesses of bubble-dependent American consumers provided high-octane fuel for China's export machine. As export-led Chinese growth surged, so did its saving surplus. China recycled that surplus back to the U.S. in order to keep America's consumption bonanza alive. It bought dollars — especially Treasuries — enabling the U.S. to keep spending and sustain itself despite an ever greater shortfall in savings. China, the lender, was seemingly the perfect match for America, the debtor. The imbalances in both economies fed on each other.
But then the music stopped. For China, the fiscal crisis and Great Recession offered a wake-up call, a signal to rebalance and move away from unsustainable external demand toward untapped internal consumption. Such efforts now appear to be under way. And that's where it comes full circle. China, the world's biggest surplus saver, gets it. It will now save less and consume more. Conversely, the U.S., with the world's biggest savings deficit, doesn't get it. At least that's the message to take from the disappointing outcome of the debt-ceiling debate.
Tough questions face us in America. Absent China as a buyer of Treasuries, who will step up and fill the void? And on what terms? That latter point is key. With increasingly skittish foreign lenders now likely to require concessions in the form of a weaker dollar and higher U.S. interest rates, there will be new pressures on U.S. inflation and growth.
Steeped in denial and drawing a false sense of security from the dollar's status as the world's reserve currency, Washington continues to take foreign capital for granted. That is a serious mistake. As Tennessee Williams put it, ultimately, there is little consolation in the "kindness of strangers." America's free ride on the deficit and debt cycle is over.
Stephen S. Roach is the non-executive chairman of Morgan Stanley Asia and a former chief economist of the investment firm. He is the author of The Next Asia.