Our Place in the World: U.S.
mortgages its sovereignty
By Kenneth Torp, December 3, 2004
The official philosophy of the government presided over by
George W. Bush views the United States as standing outside of history
-- unfettered by traditional forces that dictate the rise and fall of
civilizations and immune to the limits imposed on great powers by the
broad sweep of historical trends.
According to this view, the United States is unique, and
uniquely good, and constitutes a singular exception in the history of
mankind. It can thus exercise its superior power unilaterally without
worrying overly much about long-range consequences or the views of
other nations. Never mind that "exceptionalism" requires a breathtaking
ethnocentrism; it is, quite simply, unsustainable in the context of a
global market economy.
The international financial system, for example, doesn't give a
fig for U.S. "exceptionalism." Rather, it operates on its own set of
principles that are resolutely market-based and transnational.
The "exceptionalists" may believe they have repealed history but
the laws of economics are not so easily ignored. A chesty Vice
President Cheney tells us that the United States will never ask for a
permission slip before acting in its own self-interest. But even a
cursory look at U.S. fiscal and trade numbers leads to the conclusion
that the economic policies of the Bush administration already have
reduced our economic sovereignty. The "exceptionalists" are simply
whistling in the graveyard.
Curently, the U.S. fiscal and trade deficit is about $600
billion, or 6 percent of gross domestic product. Virtually the entire
deficit is structural, not related to cyclical economic ups and downs.
Debt held by foreigners totals $2.6 trillion, or 23 percent of GDP.
Economists at Goldman Sachs calculate that this figure will exceed 60
percent by 2020. Most of this debt is now held by foreign central banks
in the form of Treasury bonds, as opposed to stocks held by private
The United States now is consuming three-quarters of the world's
entire surplus savings. If the Bush plan for privatizing Social
Security becomes a reality, the transition cost will require either
spending cuts (highly unlikely) or additional borrowing (more likely)
of between $2 trillion and $3.6 trillion over the next 10 years. One
immediate result of all this red ink is that the dollar has lost half
its value relative to the euro since 2000 and some economists expect it
to decline another 20 percent to 40 percent.
Chairman Paul Volker recently stated there was a 75 percent chance of a
currency crisis in the United States in the next five years.
The United States may be "exceptional," but international
bankers are unimpressed. When you owe as much as we do to foreign
creditors, sooner or later they will call the tune and we will be
obliged to dance. Our foreign creditors don't even have to call their
loans to bring on the ultimate day of financial reckoning. All it takes
is a sharp decline in their willingness to finance further fiscal
profligacy. Interest rates will be forced up, bond prices will nosedive
and interest-rate-sensitive industries will feel the pinch, especially
real estate that is probably overpriced anyway. A rapid contraction of
U.S. economic activity is far from unthinkable, and with it a worldwide
reduction in trade, investment and economic growth.
With the United States barely able to debt-finance the war in
Iraq, our foreign creditors are not likely to foot the bill for another
controversial U.S. military operation. In other words, the ability of
the United States to defend itself against the next (real) threat is
severely circumscribed by the Bush administration's ideological
commitment to tax cuts and its refusal to exercise even a modicum of
It is, of course, altogether possible that placing some
restraining power over U.S. foreign adventurism in the hands of
non-U.S. central bankers is not all bad. But in the long run, the
wisdom of mortgaging a substantial share of our sovereignty to foreign
creditors may constitute one of the largest blunders of U.S. history.
The staggering irony here is that the most bellicose
administration in recent history on issues of international cooperation
is likely to bring about the sharpest curtailment of foreign policy
sovereignty by handing veto power to the very same international
players it so routinely snubs.
Kenneth H. Torp of Seattle is a consultant in
international public finance. He is also a retired U.S. foreign service