Chinese, Japanese investments
leave U.S. economy vulnerable
By Tom PLATE Syndicated columnist: Nov.
LOS ANGELES: The political implications of economic trends are
often underestimated. Almost every economist missed predicting the
Asian financial crisis of 1997-99. In the United States right now, the
growing ferocity of the anti-U.S. counterattack in Iraq has the public
almost totally preoccupied with doubts about that war and the emerging
American empire (Afghanistan, Iraq, Central Asia).
Almost but not entirely: Recently, some smart thinking has
surfaced about the fragility of the U.S. economy. John Wiley &
Sons, a major publisher, has just released a terrifying new book,
"Financial Reckoning Day," by maverick investment gurus William Bonner
and Addison Wiggin. It asserts that America is about to become a Japan,
sinking into the first major "soft depression of the 21st century."
In its current issue, The National Interest, an influential
Washington based quarterly that tends toward conservative views,
banners another terrifying perspective on U.S. economic vulnerability
as "Going Critical: American Power and the Consequences of Fiscal
Overreach." It's jointly written by New York University professor and
Oxford University senior research fellow Niall Ferguson and Boston
University economist Laurence J. Kotlikoff. They believe that the U.S.
economy is now vulnerable to a collapse at least as serious as the
Asian financial crisis:
"In short, the colossus that currently bestrides the world has
feet of clay. The latent fiscal crisis implies, at best, an
empire run on a shoestring, at worst a retreat from nation building."
This worry concerns two
major Asian nations in particular China and Japan. That's because they
have invested heavily in U.S. bonds. Many
Americans are aware that the
Japanese government socks away heaps of yen in Treasury investments,
both for safekeeping and interest yields. But the extent of China's
U.S. Treasury holdings is not as well known.
But it's well known in
China, which, earlier this year, became the second biggest holder of
American T-bonds (after Japan, but ahead of No. 3 United Kingdom),
carrying well more than $300 billion in various ways. A
editorial in People's Daily, China's official newspaper, expressed this
concern: "In case the two countries suddenly became foes due to the
Taiwan question or other issues, China might face economic sanctions
and blockade imposed by the United States; then, the huge amount of
U.S. T-bond assets China holds may face the political risk of being
Anything's possible but here's another scenario that's at least
as plausible. Given President Bush's penchant for costly empire
building and tax cuts, it's not hard to imagine the federal deficit
considerably exceeding its current level of 5 percent of gross domestic
product, with inflation popping into double digits.
That would put the U.S. economy in dire straits and perhaps give
China the opening to cause trouble in the Taiwan Strait.
It hasn't happened so far, of course, for two reasons. Taipei
hasn't declared formal independence, and the U.S. government could
steel its insistence that the mainland play nice with Taipei with a
But faced with the more frightening prospect of a huge
recession, how tough could the U.S. government afford to be? Beijing
could begin withdrawing its billions any time and reinvest them in
would deepen any U.S. financial crisis.
To be sure, under ordinary circumstances it is not in China's
interest to roil relations with the United States, its biggest export
market. But America's empire-aholism not to mention welfare state
obligations forces it to depend on foreign investments to keep from
sinking deeper into a red ink sea. This could limit future policy
A comparable scenario could be played out against Japan, too. As
the No. 1 holder of Treasury paper, Tokyo has remained a loyal ally.
But the unpredictable sometimes does happen, doesn't it? The current
edition of Foreign Affairs, the prestigious journal of America's
foreign policy establishment, headlines a discussion of "Japan's New
Nationalism." Most Japanese would regard a remilitarization scenario as
the height of absurdity even a form of Japan bashing.
But does the United States
not lose a measure of political influence with its excessive economic
dependence on foreign governments? This is the question the American
people need to start asking and soon.
(Copyright 2003, Tom Plate)
Tom Plate is a UCLA professor and founder of the Asia Pacific Media
Network (www.asiamedia.ucla.edu). His column appears regularly on
editorial pages of The Times.