[Viewpoint] America’s ‘exorbitant privilege’

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[Viewpoint] America’s ‘exorbitant privilege’

The coming U.S. “pivot” to Asia will be expensive, and Ron Paul and many others have frequently suggested that U.S. retrenchment is necessary to bring the budget into some balance. A large “declinist” literature emphasizes long-term U.S. problems like atrocious public finances, too many wars, bad public schools, political gridlock and rising anti-Americanism in the world. Fareed Zakaria’s “post-American world” captures are lot of this, and apparently the Chinese believe the United States is in decline too. U.S. commitments in Korea and Japan would obviously be impacted.

Economists find it hard to imagine how America can borrow $1 trillion to $1.5 trillion a year and stay on top. It borrows around 9 percent of GDP per annum, and the IMF calculates it’s debt-to-GDP ratio to be 100 percent, including state and local debt (it’s 75 percent now at just the federal level). How can America fight so many wars and commit so globally - especially in Asia now - without national exhaustion and diversion of investment from domestic priorities like infrastructure or health care? Signal markers in the decline and fall of empires are heavy borrowing and frequent wars which sounds a lot like America today.

Yet major retrenchment never seems to happen. Analysts are constantly amazed (and intellectually perplexed) that non-Americans seem to have an unquenchable thirst for dollars. Asian banks alone sit on over $5 trillion, with Korea alone holding over $300 billion. And this is the big reason why all those claims that the United States would collapse under its debt burden have never materialized. Longstanding critics of U.S. foreign policy have predicted U.S. retrenchment from Asia since Vietnam - and it doesn’t happen.

Who is not amazed that the catastrophic one-two punch of the recession and the badly mismanaged war on terrorism in less than a decade did not dramatically set back U.S. power? Yet when Standard & Poor’s downgraded America last summer, the very next day U.S. interest rates went down as everyone fled to the greenback safe-haven. Apparently, America’s ‘exorbitant privilege’ of printing the global reserve currency is even more exorbitant than anyone has ever expected.

Last decade many said the Bush administration’s $400 billion annual borrowing was unsustainable. Yet for the last five years, America borrowed triple that, with another decade projected at that level - but at the lowest interest rates in its history. Its ability to borrow, and thereby forestall retrenchment, is simply astonishing. The current rate on the U.S. 10-year Treasury bill is at an all-time low of 1.4 percent. Factor in inflation, and the borrower actually loses money. So here is one big reason why America fights so many wars: because it can, because foreigners make it so easy by practically begging the U.S. government to take their money. It’s surreal how cheap America can borrow, and this will fund the coming pivot.

Paul Krugman made this point in a recent op-ed: “none of the disasters Republicans predicted has come to pass. Remember all those assertions that budget deficits would lead to soaring interest rates? Well, U.S. borrowing costs have just hit a record low. And remember those dire warnings about inflation and the ‘debasement’ of the dollar? Well, inflation remains low, and the dollar has been stronger than it was in the Bush years.”

Centrists’ natural deficit hawk instincts say conservatives are right about the debt build-up, but in fact, Krugman has been borne out these last few years. So why not pivot to Asia when it will cost so little? Foreigners seem endlessly willing to fund American military commitments, which I find so bizarre and inexplicable that I wouldn’t believe it unless it were the reality around us now.

Worse, for the declinist, retrenchment-will-be-forced-on-the-U.S. position is, that the euro crisis continues to make the dollar a preferred safe-haven (so lowering borrowing costs), that China must continue to lend to America in order to hold-up the value of its current $3 trillion in reserves (again pushing down U.S. borrowing costs, no matter how many commitments we take on), and finally that a growing body of evidence suggests that China cannot continue its growth levels without serious reform.

Wen Jiabao himself said that China risks turmoil on the scale of the Cultural Revolution without major changes. If China slows, that automatically buys U.S. hegemony a breather, because position in international politics is relative and zero-sum: if China slows, then the United States recovers. And it is increasingly obvious that there are lots of ways China could derail in the next two decades: whether through tightening environmental and demographic caps on growth, from political or democratic transition turmoil, or by scaring its neighbors so much that they line-up to contain it.

In short, American hegemony and alliance sprawl, including the pivot to Asia, is turning out to be more durable during this period when the United States seems to be on the ropes, than almost anyone thought. America’s ability to borrow and keep its global hegemony rolling along is staggering. Almost everyone expected the bond market to turn against the United States in the last decade given exploding debt and deficits, huge welfare state expansions like Medicare part D and ObamaCare, the financially mismanaged war on terror, China’s ascent, the Great Recession, and two rounds of quantitative easing. But it didn’t happen. The United States is exploiting its “exorbitant privilege” worse than any other time in its history and the inflation-adjusted cost is .?.?. zero.


* The author is an associate professor of international relations in the department of political science and diplomacy at Pusan National University.

by Robert E. Kelly

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