The Real National Security Threat: The Bush Economy

By Ian Williams, AlterNet. Posted January 13, 2004.

A lot of liberals accuse George Bush of cowardice. It's a preposterous accusation to level at a president who is running at least two staggeringly expensive wars at the same time, even as he threatens to take on more, not to mention planning an invasion of Mars and cutting taxes on all your rich friends. And all this in the face of the world's biggest ever trade and budget deficits. Now that takes cojones ... unless, of course, you think that the president keeps his brains in the same general area of his anatomy.

Most Americans, who have been hearing endless reports about the so-called economic "boom" on TV, may not realize that the country is, in fact, worth a third less than it was a few years ago. With the dollar plummeting in value, the U.S. economy is far poorer when measured in terms of Euros or pounds.

For 30 years, wealth inside America has been shifted from the working poor to the stock-optioned rich, and the White House and the media expect us to celebrate -- as though a booming stock market is going to cheer up the single mother who has been thrown off welfare and forced to look for a minimum wage job. But with the dollar falling so precipitously, it's time to pay close attention to just how badly our economy has gone awry.

The secret to the looming catastrophe is our bloated deficits, trade and budget. Last year, for example, we bought over $100 billion more stuff from China than we sold them. China took a leaf from Japan's book and bought U.S. treasury bonds with the surplus. This in turn kept our external payments in balance, and gave George W. the money he needed for the Iraq war and beloved tax cuts. Neat, huh?

It is not just China and Japan, but also South Korea, Hong Kong, and Taiwan that are reinvesting their trade surplus in treasury bonds. In other words, fast as you can sing "the West is in the Red," the U.S. budget deficit is now entirely dependent on Asian capital flows.

Here's the catch: What flows in could just as easily flow out.

In the long term, it does not make sound economic sense for these nations to keep their money in low-interest dollar bonds that annually lose ten percent of their value for every percent they earn in interest. It's the reason why most of the Asian central banks have publicly endorsed the idea of balancing their currency reserves by investing in Euros. Some of their analysts think even old-fashioned gold is a better bet as it continues steadily to gain value against the dollar.

Any shift in this pattern hinges on investor confidence. Across the world, people buy dollars because they think the U.S. economy is basically sound, and that the U.S. government is stable and rational in its management of its economy and currency. Given the Bush administration's policies in recent years, both assumptions look shakier than ever.

The most ominous sign of trouble came from an unlikely source, the International Monetary Fund, which in the good old days was the sharp crusading edge of Washington's export of capitalism. Yet it is the IMF that is now crying foul at the administration's economic plans. Last week, a team of economists from the fund predicted that the U.S. could owe 40 percent of its total economy within a few years -- a statistic that will take the United States to an Argentinean scale of indebtedness. Quite apart from the effect of this massive debt on the U.S., the IMF is worried about what will happen to the world economy when things come unstuck. The economists do not envisage a soft landing with a deficit on this scale.

Indeed, the United States' position is worse than it looks since its problems run deeper than the national level. Thanks to a federal system of government, much of the money that central governments control in other countries is spent in this country by state, county and city governments. And they are all facing growing deficits. It all adds up to a fiscal nightmare.

There are few reasons in the long run for foreigners to want to put their money in a rapidly depreciating currency that pays lousy interest rates. What's more, the Bush foreign policy doesn't exactly inspire confidence. The more the U.S. government acts as a solo rogue elephant in world affairs and disregards international law, the less secure foreign investors will be that they can get their money back on demand. There has already been an outflow of Arab money as the Sheikhs worry that between John Ashcroft and ambulance-chasing lawyers, their holdings can be easily frozen or confiscated.

And if the investors all get the jitters together, the U.S. will experience a snowball effect, similar to the meltdown in South East Asia and Argentina.

A run on the bank is a real possibility, and, as we know, these get out of control. It led to breadlines in Buenos Aires recently, and our very own Great Crash of 1929.

So why is George W. not more worried? As it turns out, in typical style, administration officials have seized this very scenario as yet another justification of their radical foreign policy. Some neoconservatives suggest that since the decline of US economic supremacy is imminent, it is more important than ever to extend our military control around the globe while we still can, even if it accelerates our economic decline.

It is a highly short-sighted view, but hardly surprising given that these are the same people who designed the Iraqi exit strategy. When it comes to national security, military bases are unfortunately unlikely to do the trick in this era of globalization. The Chinese don't need their nuclear arsenal to devastate the United States. All Premier Hu Jintao needs to do is to pick up the phone and shout "sell." Selling the T bonds would be far more effective and incur far less damage to China than a military confrontation. Of course the Chinese economy would suffer, but it would survive thanks to its relatively centralized, isolationist system.

The other group of people who could pose a similar threat are the oil-producing countries, the same folks who gave us the 1973 oil crisis. The U.S. is more dependent on oil imports than ever before. Since the demise of the British sterling as a reserve currency, almost all of them have accepted dollars in payment. They bank them abroad, invest them, or spend them on American arms when allowed.

While it is unlikely, it is not totally impossible that the Bush administration's policy of locking up anyone called Mohamed and favoring Israel might drive the Arab countries to try an oil embargo again. It is, however, quite feasible that they may simply decide to follow in the footsteps of Saddam's Iraq and demand payment in Euros in the future. The math is simple: If they had done so a year ago, for every 85 cents (one Euro, at the time) they put in the bank, they would now have earned a $1.30.

Thanks to my-way-or-highway approach of the U.S. government recently, it wouldn't be surprising if other nations rubbed their hands with glee at the prospects facing the U.S. Luckily, even the Germans and the French are more mature and responsible, and like the IMF, worry about the effects of Bush policy on the world economy.

But it is only a matter of time before the rest of the world begins to tire of financing the administration's military, fiscal and economic irresponsibility. More importantly, these nations have aging populations of their own. There is no way that their governments are going to finance the huge impending Medicare and Social Security deficits that Bush is brushing under the carpet.

Ian Williams is a regular contributor to AlterNet. He is also the UN correspondent for the Nation.

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