|International Herald Tribune
A debt culture gone awry
By Hamid Varzi
Friday, August 17, 2007
TEHRAN: The U.S. economy, once the envy of the world, is now viewed across
the globe with suspicion. America has become shackled by an immovable
mountain of debt that endangers its prosperity and threatens to bring
the rest of the world economy crashing down with it.
The ongoing sub-prime mortgage crisis, a result of irresponsible lending
policies designed to generate commissions for unscrupulous brokers, presages
far deeper problems in a U.S. economy that is beginning to resemble a
giant smoke-and-mirrors Ponzi scheme. And this has not been lost on the
rest of the world.
This new reality has had unfortunate side effects that go beyond economics.
As a banker working in the heart of the Muslim world, I have been amazed
by the depth and breadth of anti-Americanism, even among U.S. allies,
manifested in reactions ranging from fierce anger to stoic fatalism. Muslims
outside the United States interpret America's policies in the Middle East
not as an effort to spread democracy but as a blatant neocolonialist attempt
to solve its economic problems by force. Arabs and Persians alike argue
that America's fiscal irresponsibility has forced the nation to seek solutions
through military aggression.
Many believe that America's misguided adventure in Iraq was a desperate
attempt to capture both a reliable source of cheap oil and a major export
market for the United States.
The United States borrows a whopping $2.5 billion daily from abroad to
service its burgeoning debt. In order to continue borrowing at reasonable
interest rates America needs to retain credibility with its overseas creditors,
especially Far Eastern nations running huge trade surpluses. A cessation
of foreign lending would force the Fed to raise interest rates to attract
money, precipitating a collapse of the already weak housing market and
pushing the economy into recession.
This is why the Chinese, in particular, have threatened to retaliate against
proposed U.S. trade sanctions by reducing their $1.3 trillion in dollar
The U.S. debt situation is so grave that the Chinese would not even need
to "dump dollars" to precipitate a meltdown but could simply
refuse to extend further credit: They could cease purchasing additional
Treasury Bonds and Treasury Bills, without selling any excess inventory.
China has the far stronger hand, because a run on the dollar would merely
reduce China's gigantic cash surplus while increasing America's debt burden
to astronomical levels.
U.S. debt affects all nations, but in surprisingly different ways: Third
world farmers suffer from the effects of gigantic U.S. farm subsidies
aimed at reducing the trade deficit, while Russia has actually profited
from America's lack of discipline.
Flush with funds generated from a decade of trade and account surpluses,
Russia views U.S. sensitivity to its expansionist energy policy as a response
to America's own failure to reduce energy waste and exploit alternative
energy sources when it had the opportunity to do so. In sum, American
economic decadence has become a source of Russian strength.
America's supply-side economists argue that there is nothing wrong with
going into debt, but this is valid only as long as a nation and its consumers
are gaining something in return.
What have Americans gained from their nation's mountain of debt? A crumbling
infrastructure, a manufacturing base that has declined 60 percent since
World War II, a rise in the wealth gap, the lowest consumer-savings rate
since the depths of the Great Depression, 50 million Americans without
health insurance, an educational system in decline and a shrinking dollar
that makes foreign travel a luxury.
The best cars, the best bridges and highways, the fastest trains and the
tallest buildings are all to be found outside America's borders. Supply-siders
ignore the crucial distinction between, on the one hand, debt employed
as an investment vehicle to enhance competitiveness and, on the other,
debt used to pay off current expenses and to create even more debt.
The bottom line is that America is awash in red ink and seeks the wrong
solutions to its debt problems. A return to fiscal responsibility would
make America far stronger, both domestically and internationally, than
would a continuation of current policies that falsely project strength
through idle protectionist threats and failed military aggression.
Current tensions between the United States and the rest of the world will
continue as long as America's military bark is louder than its economic
A solution to the U.S. debt problem requires radical measures, including:
the elimination of corporate tax loopholes, a reversal of tax breaks for
the ultra-rich, a bipartisan campaign to eliminate budget "pork,"
imposition of stringent limits on corporate debt and speculative lending,
a vast reduction in military expenditure and, finally, an additional 50
cent per gallon gasoline tax that would slash the federal deficit, curtail
energy waste and spur technological breakthroughs.
Let us hope America heeds the warnings, dispenses with junk-food economics
and embraces a crucial diet of fiscal discipline. It remains to be seen,
however, whether America's political leaders have the courage to instigate
such reforms, and whether Congress is finally willing to do something
for the future of ordinary, hard-working Americans.
Hamid Varzi is an economist and banker based in Tehran.