Saturday, February 19, 2005

US economy strong

We have all heard in the mainstream news media the argument that the United States is on the decline because it is running budget and trade deficits. Well, below is an excerpt from a column by David Levey and Stuart Brown published in the International Herald Tribune titled U.S. hegemony has a strong foundation.

It is sometimes difficult to explain to people why a nation that holds fewer foriegn assets than foreigner hold of its own assets is not necessarily on the decline. But I'll try anyway. If people around the world (including citizens of the United States) prefer investing in the United States to investing elsewhere there will be a flight of capital into the United States, some held by foreigners and some held by Americans. But something must balancing out this flight of money into the United States. What is that something? Dollars in exchange for foreign products, thus, the trade deficit. I'll stop chatting and let you read the column.
Would-be Cassandras have found a new threat to U.S. hegemony: overdependence on foreign capital and growing foreign debt.

The U.S. economy, according to doubters, rests on an unsustainable accumulation of foreign debt. The current account deficit - the difference between what U.S. residents spend abroad and what they earn abroad in a year - now stands at almost 6 percent of gross domestic product; total net foreign liabilities are approaching a quarter of GDP. Sudden unwillingness by investors abroad to continue adding to their dollar assets, in this scenario, would set off a panic, causing the dollar to tank, interest rates to skyrocket, and the U.S. economy to descend into crisis, dragging the rest of the world down with it.

Despite the pervasiveness of this doomsday prophecy, U.S. hegemony is solidly grounded: It rests on an economy that is continually extending its technological lead, ensuring its continued appeal for foreign investors. The dollar's role as the global monetary standard is not threatened, and the risk to U.S. financial stability posed by large foreign liabilities has been exaggerated. If anything, the world's appetite for U.S. assets bolsters U.S. predominance rather than undermines it.