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America Wants Its Money!

"The great winner of the Olympic winter games is clear. America is the winner... Five months after the terrorist attacks, a nation is intoxicated with flags and fanfare. The other nations show the greatest reverence to global
capitalism. They give their savings to the Americans."
No country depends on foreign investment as much as the US
America wants its Money!

By Thomas Fischermann and Wolfgang Uchatius

[The strongest power of the earth lives from the capital of foreign countries. How long will the world tolerate this? This article originally published in: DIE ZEIT, 08/2002 is translated from the German on the World Wide Web, www.zeit.de/2002/08/Wirtschaft/print_200208_usa.html.]

The great winner of the Olympian winter games is clear. America is the winner, not a ski jumper, downhill racer or tobogganist. Five months after the terrorist attacks, a nation is intoxicated with flags and fanfare. The other nations show the greatest reverence to global capital capitalism. They give their savings to the Americans.

The US as a world power is dependent on the rest of the world more than any other industrial country, on German corporations, English investment funds, Japanese banks, in short on foreign sponsors. Since the beginning of the eighties, Americans have spent more money than they gained. Economists call the balance of payments deficit the annual hole. In the year 2000, this deficit was $450 billion. The New York investment bank Morgan Stanley expects an increase to over $600 billion in the coming years. "America lives at the expense of foreign countries," said Wolfgang Filc, economics professor at the University of Trier.

Running into Debt like Reagan

Running into debt has accelerated with (p)resident George W. Bush. American consumers and entrepreneurs lived above their means during his predecessor's time in office. However at that time at least the government still exercised financial discipline and even attained balance of trade surpluses. In contrast, Bush massively lowered taxes right at the start of his administration. His budget draft, packaged in Stars and Stripes, provides two trillion dollars extra for the coming ten years - caused by further tax cuts and the largest increase of military spending in twenty years. The bill runs up debts. He will propose a balanced budget in 2005. No budget expert believes him.

In the past, no one seemed disturbed. The world grants Americans additional credits out of its self-interest. "Investors expect greater profit in America with a lower risk", says the Munich economist Friedrich Sell. They still invest in American stocks, state- and business loans since they assume a capital return some time or other with profit. These investors believe in the innovative power, flexibility and continuing strength of the US economy, in the growth locomotive of the world or simply for lack of alternatives because prospects seem worse in Europe and Japan.

What if they err?

They have erred. The present state of the world appears dangerously familiar from the time of the republican president Ronald Reagan (1980-88). At that time American consumers and entrepreneurs spent more than they earned. Their president massively armed against the powers of evil, lowered taxes and piled up mountains of debt until the capital investors of the world suddenly realized that America was not the most profitable place of the earth. The result was the financial tumult of the late eighties. The dollar collapsed along with the stock exchange. Suddenly the whole American capitalism was put in question.

Will history repeat itself? On first view, this seems unlikely. Most analysts argue like Gail Fosler, the chief economist of the New York think tank Conference Board: "The US recession is over." The American economy has weathered the crisis more quickly than most business researchers held possible. Many indications suggest that the renewed upswing has already begun. Optimists in the Bush administration see the old power returning. They use that code word ascribed to the great promise of the new economy: the growth of productivity. The Internet and other IT-innovations, two decades of drastic business reforms, flexible labor markets and social reforms made the whole economy more efficient. Productivity growth between 1996 and 2000 amounted to 2.5 percent. Then the dot-com bubble burst. For the coming years, economists expect a productivity growth of two percent - more than the 1.4 percent in Reagan's time but less than in the past boom.

The productivity growth could be too little. In the opinion of Wall Street experts, the prices of numerous American stocks are still based on the expectation of double-digit profit rates. However some businesses did not reach that level even in the century upswing of the nineties, long before the Enron bankruptcy. Since the energy giant posted the greatest corporate bankruptcy in American history and its bosses are entangled in scandals, American businesses are under a general suspicion. Enron had puffed up its profits with accounting tricks. Was this only Enron? "How many other Enrons are there?" asked the Princeton economist Paul Krugman in the New York Times.

130 Billion in Profits Fabricated

A few answers already exist. Tricksters obviously padded the books with the telecommunication corporation Global Crossing that declared bankruptcy, the telephone company Qwest, the conglomerate Tyco, the real estate group Cendant and the computer firm Cisco. According to a study of the London Center for Economics and Business Research, businesses registered on the New York Stock exchange showed $130 billion in excess profits last year. No wonder creditors become more critical and auditors more nitpicking. From George W. Bush to the head of the Securities and Exchange commission, American politics will introduce new authorities and more strict supervision.

Some skeptics go further and see the principle of US capitalism in danger. "For years, businesses have mistaken stock prices for a game", judges Gary Hamel, professor at the London Business School and one of the most prominent shareholder value prophets. In this system with its fixation on stock prices, stock packages as managerial salaries and "absurdly impatient" investors, some managers "endanger their businesses by simply looking good on paper".

These American problems need not especially interest the rest of the world; their money is not involved. According to an estimate of the Institute for International Economics in Washington, D.C., foreign creditors hold 36 percent of US and state loans, 18 percent of business loans and 7 percent of American stocks. These shares are increasing.

By traditional economic theory, this cannot continue. Balance of payments deficits can only be held up to a certain threshold. If this is exceeded, an adjustment in economic parlance threatens, perhaps a collapse of the dollar. Employees and corporations will feel this as an economic crisis. The question is where is the threshold? The accepted figure is four percent of the gross domestic product. The American balance of payment deficit is 4.5 percent with a rising tendency. Seen this way, the value of the dollar should have massively fallen.

Instead the value of the dollar has risen. "The dollar gained in value in relation to other currencies in the past years", says the Wurzburg economist Peter Bofinger. According to an analysis of the Swiss bank Credit Suisse, investors flooded the United States with capital. The dollar could only rise. American consumers and businesses saw no reason to save any more. Ullrich Heilemann, vice-president of the Rhine-Westphalian Institute for Economic Research, remembers the reaction of international banks and investment funds in the high-tech euphoria on the stock markets. "Suddenly the investors changed their opinion and began to sell."

The crisis of the Reagan era may have been harmless compared to what could threaten. At the end of the eighties, the dollar fell around 50 percent. "However the streams of capital were much less than today", declared economist Wolfgang Filc. When they change course, the dollar will fall all the more quickly. As foreign investors invested a large part of their assets in America, they can withdraw it within a short time.

International investment banks think less globally than they claim. Financial market experts still discern a strong "home inclination" of investors. Foreign investors could leave quickly. Stephen Roach, chief economist of the investment bank Morgan Stanley, is surprised that all the capital is still there. "Dreadful data", he complains about the American economy. "The world must look for a new growth locomotive."

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