PrintMarch 4, 2009
The other side of interdependence
Democrat Senator Evan Bayh opposes some of the Democrats' massive spending (good for him!), and notes the facts of life for a debtor nation:
Washington borrows from foreign creditors to fund its profligacy. The amount of U.S. debt held by countries such as China and Japan is at a historic high, with foreign investors holding half of America's publicly held debt. This dependence raises the specter that other nations will be able to influence our policies in ways antithetical to American interests. The more of our debt that foreign governments control, the more leverage they have on issues like trade, currency and national security. Massive debts owed to foreign creditors weaken our global influence, and threaten high inflation and steep tax increases for our children and grandchildren.
Undeniably true. Should nations which hold massive amounts of debt dump it, they could wreck the American economy. But at the cost of severely harming their own economies, of course. That is a fact of life in the interdependent world economy we have constructed via massive trade deficits financed by borrowing, providing markets for the world's powerhouse exporters. Overall it is better to be the creditor than the debtor, in terms of the power dynamics. But debtors owing massive amounts also have leverage.
There are two sides to the coin of interdependence. They influence you, and you influence them back. The dynamics within that cycle are complicated and multifaceted.
It has been assumed that global interdependence is preferable to rivalry with minimal contact (as between Mao's China and pre-Nixon US). Less chance of nuclear or other violent conflict if it is all a matter of mutual influence. That was the theory behind Nixon's opening to China. Membership in the community of nations via trade has always been regarded as a moderating influence on tyrannies, by most observers. Critics point out that Germany's involvement in world markets did not moderate Hitler's actions.
Now that America is a massive debtor, one rarely-noted point is crucial: If the world ever stops accepting dollars and demands payment in some other currency when they send us goods (i.e., if the dollar ever loses its reserve currency status), the amount of leverage our creditors enjoy will skyrocket.
Hat tip: Dennis Sevakis
Hat tip: Dennis Sevakis
