UNITED States military spending, at roughly $400bn annually, now [sic] rivals
the combined total military expenditure of all other major nations.
By FREDERIC F. CLAIRMONT *
* Frederic Clairmont is an economist
UNITED States military spending, at roughly $400bn annually, now rivals
the combined total military expenditure of all other major nations. But
cracks in the US financial system are raising questions about the
continuation of funding at this level. Since the 1990s, the US, which
likes to see itself as all-powerful, has been shocked by revelations of
criminal acts by some key financial players in the system, including the
world's biggest investment banks, the Big Five auditing firms (now down to
the Big Four after the Arthur Andersen/Enron accounting scandal), media
conglomerates and prestigious law firms.
High debt levels are the most disturbing sign of the financial distress of
the US. In 2001 the US debt equalled 31% of its gross domestic product
(GDP), against 26% for the European Union and 12% in Japan. In the current
climate of shrinking production and trade, all three must now contend with
the prospect of deflation. With the exception of China, worldwide industry
is now operating at 65% of capacity. Stock markets have been in free-fall
for three years. The Conference Board's consumer confidence index dropped
from 145 in early 2000 to 80 at the beginning of this year (1985=100).
Since January 2002 the US dollar has dropped by 12% against a basket of
currencies; it has depreciated by 26% against the euro since 2000, one of
the steepest declines since the end of the second world war. Considering
rising unemployment, stagnant incomes and tentative consumer spending, the
picture is gloomy (1).
The enormous debt load of the US includes compound interest, which means
that the prospect of deflation would make debt repayment even more
onerous. US debt has three main components: the current balance of
payments; net official foreign debt; and the debt accrued over the past 40
years. The latter includes public, household, corporate, non-financial
sector, and combined domestic/foreign financial-sector debt.
Increases in total US debt are staggering. Between 1980 and 2002 levels
tripled, from $10,000bn to $30,000bn. The most striking feature has been
the phenomenal rise in companies' internal financial-sector debt, which
soared from $53bn to $7,620bn (72% of GDP). This may be attributed partly
to frenzied, debt-financed mergers and acquisitions, especially between
1980 and 1998. This was particularly evident in the banking sector, where
increased concentration after mergers has not yet reached its upper limit.
In this sector assets relating to mergers and acquisitions total $2,400bn.
In the entire history of capitalism such voracious corporate expansionism,
financed with cheap credit, is unprecedented in scope and pace. But this
phenomenon is wildly uneven in distribution: only 16 companies from
developing countries (84% of the world's population) appear on the top 500
list of the Financial Times. Dramatic increases in total household debt
confirm that US consumers are living on credit. Between 1964 and 2002
household debts rose from $200bn to $7,200bn, representing 26% of personal
incomes in 1985 and 40% in late 2002.
Plummeting savings are another symptom of the decline of US capitalism,
since savings and investment are the main engines of capital accumulation.
According to the New York-based investment bank, Morgan Stanley, the US
net savings rate - that is, the total savings of households, businesses
and governments, expressed in terms of GDP -fell to a mere 1.6% in the
third quarter of 2002, its lowest level ever. This was less than one third
of the average rate in the 1990s and only one sixth of the rates in the
1960s and 1970s. The Bush administration's mounting budget deficits will
drive down rates even more (2). The figures are illuminating: in the first
quarter of 2000 the US federal budget surplus was equivalent to 2.3% of
GDP and the savings rate was 6.4%. But in the third quarter of 2002 the US
budget was showing a deficit of 1.8% of GDP.
The key factor in the overall picture is the rapid decline in the US
current balance of payments, which may prove to be its worst weakness (3).
In this respect the US is comparable to the British empire at its height,
before1914. In the decades before the first world war Britain's current
surplus was equivalent to 4% of GDP. But because of its fragile financial
system, the US empire has chronically high current deficits, 5% of GDP.
In the 1990s the US accommodated surges in domestic demand by using
foreign debt to finance its imports. After climbing steadily for 15 years,
US imports now represent 42% more than US exports. Reducing this imbalance
is almost impossible because US products have no true competitors in the
world, despite the plunging dollar. To offset its $500bn current deficit,
growing by 10% every year, the US needs $2bn in capital inflows every
working day, 76% of the current worldwide surplus. This pace is hard to
sustain, even short term. Still, foreign capital is pouring into US
financial markets, though at a greatly reduced rate: total foreign private
investment began to rise in the mid-1990s, reaching a peak of $1,000bn in
2000, the year the Nasdaq market crashed; it has since fallen to $500bn
Preliminary signs indicate that foreign capital is beginning to flow out
of US financial markets. This trickle may become a wave owing to George
Bush's war plans for Iraq, the rest of the Middle East, and elsewhere. The
US, like a drug addict, has become wholly dependent on inflows of foreign
capital to finance its generous programme of tax cuts. Foreign investors
now hold more than 18% of long-term US equity securities and 42% of US
treasury bills. But these investments could leave the US instantly with a
few computer keystrokes. So foreign investment in 2003 must rise to at
least 6% of GDP to accommodate US budget deficits and current deficit.
Since returns on investment have traditionally been highest in the US,
investments in US securities have helped to finance its current deficit.
But such investments are beginning to look less attractive. The US is
uniquely privileged: it alone can issue dollars, and thus reduce its own
debt, a step that it has taken several times. The US government prints
dollars, paying for imports with empty promises. No other nation has this
advantage, though the benefit may prove fleeting in the current shrinking
financial markets. Ballooning deficits are undermining the US net foreign
official position (foreign assets less foreign liabilities). Between 1999
and 2002 the deficit rose from $1,900bn to $2,500bn because of mounting
None of this has reduced rampant economic inequalities in the US. Although
the stock market crash did have an impact on the wealthy, the net worth of
the 10,000 richest families in the US is now equivalent to that of the 20m
poorest families. In the companies on the Fortune top 500 list, the ratio
of CEOs' salaries to workers' wages jumped from 40:1 in 1970 (adjusted for
inflation) to 531:1 in 2003, according to Proxinvest, the French research
firm. In 1950 corporate income taxes provided 25% of federal revenues; in
2001 this had fallen to 8.9%. Unbridled debt and glaring inequalities are
not aberrations, but indicate the sick state of US society. The markets
are worrying about the financial health of the US, with the dollar
exchange rate a useful thermometer.
Christian de Boissieu, a professor at Paris-1 University and
vice-president of France's council for economic analysis, says of the
dollar: "Something happened in spring 2002. Suddenly the market pattern
started to shift. The markets were worried about the US's unsustainable
imbalances - its long-standing current deficit and recent budget deficits,
caused by lower tax revenues and higher government spending. This year
economic growth in the US should be double that in France, even though
there are still concerns about deficits. But a psychological threshold has
been crossed. At some point pessimism relating to these imbalances will
prevail over any economic optimism" (5). President Bush, who has already
called on Congress to boost military spending, seems unaware the threshold
has been crossed.
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