In the US, politicians and economists like to brag about how the US is the engine of the world economy. In a sense, it’s true. In another sense, it’s wrong. And it’s quite interesting that all those investments being made in the US have repercussions as far as the political role of the US is concerned, argues Will Hutton in today’s Guardian. Excerpt:
The US’s economic position is far too vulnerable to allow it to go war without cast-iron multilateral support that could underpin it economically as well as diplomatically and militarily. The multi-lateralism Bush scorns is, in truth, an economic necessity. America may be a superpower that spends more on defence than the next nine countries combined and is preparing to increase defence spending this year by an enormous $48 billion, equivalent to Britain’s entire defence budget, but it is a strategic position built on economic sand.
On latest estimates, its net liabilities to the rest the world are more than $2.7 trillion, nearly 30 per cent of GDP, a scale of indebtedness associated with basket-case economies in Latin America.
Its industrial base is so uncompetitive that it consistently imports more than it exports; its current-account deficit, the gap between all its current foreign earnings and foreign spending, is now a stunning 5 per cent of GDP, continuing a trend that has lasted for more than 25 years and which is the cause of all that foreign debt. As a national community, it has virtually ceased to save so that government and individuals alike live on credit.
To finance the current-account deficit, a reflection of the lack of saving, the US relies on foreigners supplying it with the foreign currency it can’t earn itself. The Old Europe that Donald Rumsfeld mocked last week has been helping to prop up the US economy, buying shares and bonds on Wall Street, taking over American companies and investing in real estate, compensating for the saving that the Americans aren’t doing themselves.