Chinese, Japanese investments leave U.S. economy vulnerable
By Tom PLATE Syndicated columnist: Nov. 02, 2003

  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 recent 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 frozen."
  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 use-of-force deterrent.
  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 Euros. That 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 options.
  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 (  His column appears regularly on editorial pages of The Times.