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March 26, 2001, U.S.
Edition
Show Us The
Money
America
needs the world's cash
By
Fareed Zakaria
Americans have always wondered just how much the rest of the world really loves them. Well, we're about to find out. As the U.S. economy slows, foreigners will have to decide whether they want to keep investing their money in American stocks and bonds. If they choose to go elsewhere, things could get much worse in the United States.
The U.S. economy has slowed at a particularly inconvenient moment in the world economy. The last time we were in recession--in the early 1990s--the rest of the world was doing quite well. Germany, Japan and the Asian tigers were all booming. Plus the U.S. dollar was cheap, which made American exports affordable around the world. The result: foreigners picked up the slack, and the American recession was the least painful since 1945.
This time around Japan is stagnant and the other Asian economies are still hurting from the '97-'98 crisis. In Germany, growth is slowing. And the dollar is at a high, making American exports very pricey. So the rest of the world will be hard-pressed to cushion America's fall.
Slow growth abroad has been a boon to America in one important respect. We have become the world's favorite investment in the 1990s. Japanese, German, Latin American investors have all put their savings in America rather than their own countries. Thank goodness, because we need the cash. These days Americans spend more than they earn. So we depend on foreign investments and loans to make up the difference--especially since our savings rates have plunged in the last decade. Last year Americans (people, companies and government) spent $435 billion more than they took in, a historic high. We took in two thirds of the capital exported from all countries that had money to spare--twice what we used to take in only five years ago.
If even a fraction of this money stopped coming into the United States, it could produce a spiral of problems: a falling dollar, which forces higher interest rates, which weakens stock prices and causes a sharper slowdown. It's a classic vicious cycle.
There are two sources of hope. First, economic reality: foreigners don't invest here out of altruism. America is the place where everybody around the world wants to put his money. You get solid returns and a secure investment. But this puts relentless pressure on the American economy to remain the most competitive in the world.
Second, political reality: America is the world's only superpower. Especially in times of crisis, investors move into what they regard as safe havens. That's why, despite the fact that the current crisis is U.S.-centered, the dollar and American Treasury bills have been in high demand. "Politics and psychology play a large role in all this," says Robert Hormats of Goldman Sachs. All the myriad aspects of American power--military might, political credibility, media power--help burnish the image of an almighty America. Let's hope the makeup doesn't rub off too soon.