When the Buck Stops
Valuable though it is, however, the seigniorage that the United States captures from abroad is small beer compared with the rewards that accrue to the country from the dollar’s standing in global capital markets. In dealings with foreigners, it is good to be able to transact in one’s own currency. Let the other guy—the foreign customer or supplier—cope with the accounting complications and carry the exchange-rate risk. Should you need to borrow abroad, it is especially good to be able to do it in your own currency.
And, my word, how America needs to borrow abroad. The country’s current-account deficit exceeds 6 percent of the gross domestic product and looks likely to continue to grow. This deficit—the gap, roughly, between what the country buys from foreigners and what it sells to them—has to be financed by borrowing. The United States, to draw an admittedly imperfect analogy with households, is adding to its overdraft each year, to the tune of more than 6 percent of its income. In the recent past, countries that have borrowed so heavily have sooner or later suffered financial collapse—think of the Latin American debt crisis of the 1980s, or the East Asian financial meltdown of the late 1990s. So how can the United States sustain such borrowing with little apparent strain? Well, those earlier financial breakdowns were also exchange-rate crises. When the Thai baht collapsed, the domestic-currency burden of Thailand’s foreign-currency debts soared, flattening the economy. Should the dollar collapse, the domestic-currency burden of U.S. foreign debts will hardly change, because the United States has borrowed in dollars, not in its creditors’ currencies. If the dollar does crash, the foreign creditors will get screwed first.
In other words, the United States can cheerfully borrow at this extraordinary rate—and thus absorb, year after year, more resources than it produces, all without arousing alarm in financial markets or having to pay punitive rates of interest on its debt—in part because of the dollar’s global eminence.
But there’s still more. As I said, the household analogy is imperfect. A family whose spending persistently exceeded its income would see its debts mount. America’s net debt is barely rising in relation to national income, despite the massive borrowing. Why? One reason is that while America pays a very low rate of interest on its debts, which are mostly in the form of Treasury securities, it receives a very high rate of return on its foreign assets, which mostly represent ownership stakes in foreign companies. This return offsets some of the borrowing. Furthermore, the dollar’s gentle decline in recent years has magnified this effect, increasing the dollar value of America’s foreign assets (selling them would now yield more dollars), while leaving the value of all those dollar-denominated debts unchanged. With apologies to George Soros, call this the alchemy of finance: The United States has found a way to borrow that adds almost nothing to its debts. And it’s mostly thanks to the dollar’s status.
Clive Crook is an Atlantic senior editor.
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