US Lacks Enough Money to Spend in Fighting Single-handed: Commentary

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Last updated at: (Beijing Time) Wednesday, March 26, 2003

US Lacks Enough Money to Spend in Fighting Single-handed: Commentary

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On March 17, the door to a diplomatic solution of the Iraq issue was closed and war will break out at any moment. What does US determination to "fight it alone" mean to global investors? And what influence will it bring on the world economy? A look over the US "account book" may help us understand this question.

The first account relates to foreign trade. US trade deficit came to US$435.2 billion in 2002, accounting for about 4.4 percent of the country's GDP, reaching an all time high.

The second is budget. The Bush administration's financial deficit for this fiscal year is estimated to be a record US$304.0 billion, and the figure will reach as high as US$307.0 billion next year. The growth of financial deficit seems to have become a long-term trend.

The third is current account. Economists estimate that US current account deficit might have reached US$504.0 billion last year, this is the highest value chalked up ever since US Department of Commerce started this statistic in 1960.

The fourth is the Iraq war and postwar reconstruction. No one can make an accurate estimation, some specialists say the figure may reach as high as hundreds of billions of US dollars.

The fifth is tax-cut. Bush wants to spur the Congress to pass the plan for a tax reduction of US$1 trillion in the next decade.

The sixth account indicates that the Bush administration will fall into the plight of failing to make ends meet. The US dependence on foreign capital will likely go up ever higher in the future. Chief Economist Roach of Morgan Stanley said: The main problem facing the United States is the lack of sufficient savings deposits by the people, thus making it impossible to satisfy domestic need of economic operation. For this, the United States has to seek capital investment from abroad, which thus entails current account deficit. Such a situation was rarely seen before in the world.

Roach's worry is by no means superfluous. The US market once served as a safe port. However, its attraction is decreasing drastically under the threefold attacks of hi-tech bubble, the Wall Street scandal and terrorist raids. An estimate made on the basis of the statistics of the first three quarters of last year revealed that foreigners took out a total of US$55.6 billion last year to buy US stocks, while the figure was US$121.4 billion in 2001 and US$193.5 billion in 2000, with the downturn rate reaching 50 percent. The case of foreign direct investment in the United States was more or less the same, the figure was US$307.7 billion in 2000, US$130.8 billion in 2001, while the figure was estimated to be only US$42.6 billion in the first three quarters of last year. The radical reduction of the above-mentioned two accounts did not cause crisis, this is because many foreign investors used the money drawn out from the stock market to buy US government bonds. The balance has aroused the worries of many economists. At present, foreign investors are not making additional input, rather they are adjusting the "basket eggs", however, there are obviously not many such "baskets" for holding "eggs".

Foreign investors approximately have to go through a "trilogy" if they want to "withdraw" from a country. The first step is to reduce input, and then discontinue making new investment and finally spirit their money away.

The first step is now drawing to an end, the second step is making its debut. At this moment, the United States is going to use force against Iraq by sidestepping the UN Security Council, what course will foreign investors take? The New York Times commented: It would have been impossible for the first Gulf War to succeed without the financial support from countries like Japan, Saudi Arabia and Germany. Likewise, the second Gulf War and postwar reconstruction also need to rely on foreign investors, however, the point is they do not support US strategic goal this time.

Not long ago, the following story was published in the monthly of Merrill Lynch, which goes like this: In July 1956, Egypt declared to nationalize the Suez Canal, Britain and France joined hands in their armed intervention, trying to recover their control right. But their action had neither the authorization of the United Nations, nor the approval of the United States. Although Britain's current account had surplus at that time, its capital began to flow out in huge amounts as soon as the gun was fired. Owing to the enormous pressure of market speculation, Britain was unable to maintain the stability of its currency, and had to ask for aid from the International Monetary Fund (IMF). At that time the United States indicated that unless Britain pulled out its troops in compliance with the UN resolution, otherwise the United States would give it no support. Finally, Britain was forced to declare withdrawal of troops.

In telling this story, experts of Merrill Lynch just want to show that since the United States wants to borrow money from international investors for lack of sufficient money to spend, its political choice is bound to affect the investors' wishes to lend money. The Economist magazine asserts that it is as impossible to decide on the price of the war against Iraq as that of the Vietnam War. The most important thing is that US allies would not be as willing to donate money as it did in 1991. Moreover, the dim economic prospect of the United States has disturbed its trade partners.

By PD Online Staff

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