U.S. Debt Is Not the Culprit


HONG KONG — Asian reactions to the so-called U.S. debt crisis amount to a mixture of bafflement and hypocrisy. Fear of the knock-on effect on regional economies sits side-by-side with assumptions by Asians that they had no part in creating today's problems.

The Chinese have been howling particularly loudly. Chinese media have been castigating the U.S. government for reliance on debt finance, while the state rating agency Dagong not only took the lead in downgrading U.S. debt but has said that Washington has already defaulted.

Yet just as Western countries, or at least their banks, played a crucial role in turning the 1997 Asian crisis of liquidity into a crisis of solvency, Asia is now ignoring the fact that the U.S. problem is less one of government debt than of sustained international trade imbalances, which have transformed America into a debtor nation. And the policies of Asian nations have contributed to this problem.

By the standards of many countries — including China if one adds state-bank and local-government debt to the debt of the central government — the U.S. government's debt is not exceptional. Japan's is far greater, yet the yen has become one of the safe havens for those fleeing the dollar. The U.S. debt “crisis” was, in fact, largely a creation of the antics of U.S. Congressmen.

The underlying problem in the United States is not so much the level of government debt but the persistence of the overall trade deficit, which has meant that Washington, unlike Tokyo, has had to rely heavily on foreigners to buy its debt.

The ability of United States — because of the U.S. dollar's position as the main reserve currency — to borrow so easily is only half an explanation. No one forced China, Korea and other Asian countries to buy so much U.S. debt. And other countries were not forced to peg their currencies to the dollar.

No one forced them to try to gain trade advantages while depriving their own people of purchasing power by manipulating their currencies. No one forced them to endure inflation rather than raise interest rates and allow their currencies to appreciate significantly.

The dollar needs to decline further vis à vis some Asian currencies. That way the United States will return to trade equilibrium, while surplus countries will be forced to substitute domestic demand for external demand if they want to grow and, ultimately, to protect the long-term value both of the dollar and of their huge holdings of Treasury bonds.

The “threat” not to buy more U.S. bonds if Washington does not mend its ways is no threat at all. The dollar will decline but the Fed will buy the bonds and China and others will have to find other assets to buy — like their neighbors' bonds, if they are allowed.

In short, the current, so-called crisis is causing yet again some bizarre, panic-driven decision making.

The Korean government has chosen this moment to buy gold at a price six times that of August 2001 and within sight, in inflation-adjusted terms, of its short-lived 1980 peak. Asian investors are continuing to believe that countries like Australia and New Zealand are safe havens even though their foreign debts, relative to their economies, are several times those of the United States. New Zealand has net foreign debt of 130 percent of G.D.P., and Australia 60 percent, yet they still get a top rating from the credit rating agencies and their currencies have been very strong despite experiencing external deficits during a boom in their commodity export prices.

Meanwhile, the currencies that should be much stronger — like South Korean won, Taiwan and Hong Kong dollars and Chinese renminbi — are forcibly held back.

It is all very well for China to bemoan the decline in the credit worthiness of the United States but its own credibility can only be tested by exposure to the market. Asian national currencies can only play the larger global role they say they want if they are more freely traded — particularly by their own citizens.

In sum, it appears that the 2008-09 recession was too short for the United States and Asian countries to have learned the necessary lessons: The root of global instability still lies in trade imbalances and currency values, and the need for adjustments in both Asia and the United States.