The Perils Of A Debtor Nation

Irwin M. Stelzer: The U.S. Could Learn Some Valuable Lessons From 1946 Great Britain

(Weekly Standard)  Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

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Americans should be hoping that the Chinese will be kinder to us than we were to the Brits after World War II. Readers of a certain age will remember, and the few younger ones who study history will have learned what creditor Uncle Sam did to debtor John Bull when Britain sent John Maynard Keynes to Washington to negotiate borrow the odd billion from us. Britain had spent blood and treasure to beat the Nazis, and was hoping or a gift of $3 billion, a credit line of $5 billion, and other generosities. As Robert Skidelsky points out in his magnificent biography of Keynes, "The Americans had never accepted that they owed Britain a moral debt" for its disproportionately large sacrifices. Instead, President Truman, advised by communist spies such as Harry Dexter White, insisted on terms so onerous that the Britain was, in some views, permanently expelled from the first rank of economic powers for decades, until Margaret Thatcher decided that her government's job was definitely not merely to manage decline.

Fast forward to today, and the plunging dollar. The Obama administration may mouth support for a strong dollar, but markets aren't easily fooled, or if fooled, are not fooled for long. They know that administration policy is relying heavily on a depreciating currency. In the short run, the White House hopes that a combination of protectionism and a cheap dollar will reduce the flow of imports and increase the volume of exports. That, the theory is, will create jobs "right here in America" as the Wal-Marts of the country switch to domestic suppliers.

In the longer run, the administration knows that it will somehow have to repay the massive debts it is incurring as it attempts to stimulate the economy, throws another trillion at what it sees as an underperforming health care system, and prepares to burden the energy economy with billions, or even trillions, in new costs in the interests of satisfying the green lobby that it is doing something about greenhouse gas emissions.

Of course, the Obama team could take a lesson from Argentina, which defaulted on its debts eight years ago and nevertheless is headed back into the market, to borrow money from lenders eager to increase their returns and afflicted with memory loss. P.T. Barnum, the great circus impresario, said, "There's a sucker born every minute," although it is not certain that he had international bankers in mind, since an annual sucker-birth rate of 525,600 might have to include more than leading bankers. Some regulators, perhaps.

But debt repudiation would be unbecoming a great power, much less one that hopes to maintain the dollar as a reserve currency. If indeed American any longer does. The administration's critics, among them Pulitzer Prize winning commentator Charles Krauthammer, believe the President wants to make America less of a hegemon and more of an ordinary nation, much like others in the international organizations of which Obama is so fond. That effort includes an increase in the U.S. contribution to the International Monetary Fund's ability to issue drawing rights, which the Russian, Chinese, and other regimes hostile to America want to see replace the dollar as the currency in which the world does business -- unless, of course, they find some way to have their own currencies become more acceptable in international trade.

But even the Chinese do not see the dollar's role being so diminished in the near- or medium-term future. Instead, they see themselves in the position that America was in vis-à-vis Britain in 1946. America is deeply in debt, and with the red ink cascading across the nation's books, digging itself deeper into debt every day. The Chinese, America's principal creditor, are worried that Obama and his successors will attempt to pay back the more-than-trillion dollars it owes China in wildly depreciated dollars. So it is making it known that it wants to see some plan coming out of the White House that will begin to reduce the deficit and, eventually the national debt.

No such plan exists. Obama, who styles himself a "transformational president", intends to keep the spending taps wide open. The old adage that if you owe your banker a few dollars he has you under his thumb, but if you owe him a huge sum you have him where you want him, is not true. Not if the Chinese are your creditor. So it should be no surprise that Obama is the first president to refuse to receive the Dalai Lama, despite the urgings of the louche celebrities who helped fund the President's election campaign. Or that America no longer presses the Chinese regime on human rights issues.

Which brings us back to Keynes, Truman, and the post-war world. Unless there is a major change in US economic policy, and soon, our version of the great British economist, White House adviser Larry Summers, Treasury Secretary Tim Geithner, or Federal Reserve Board chairman Ben Bernanke, or all three, will head to Beijing to plead for the Chinese to continue lending us money. The terms we will be offered are unlikely to be easy, and will include IMF-style controls on our fiscal policy.

Exaggeration? Perhaps, but less so if, as has been true in the past, the great, resilient American economy offsets the mistakes of its political masters by growing our way out of the problem. "The good news is that this deep and long recession appears to be over, and with improving credit markets, the U.S. can return to solid growth next year without worry about inflation," Lynn Raeser, president of the National Association of Business Economists told the group's annual gathering last week. Set aside the predictable drop in auto sales after the demise of the cash-for-clunkers program removed a $4,500 per-car subsidy, and retail sales are looking rather good -- up somewhere between 2% and 3% at an annual rate in the third quarter. Banks are coming to the end of a period of massive write-downs, even though billions in consumer and commercial property loans remain to be written off. Corporations are sitting on piles of cash, waiting to be spent if the uptick in consumer spending proves durable. Banks are again lending to developers of commercial properties, and house prices seem to be somewhere between stable and rising, although the risk that the patient will have a relapse is not trivial.

Add to renewed growth the apparent willingness of the Fed to head off inflation -- Bernanke's statement to that effect stemmed the dollar's decline, whereas statements favoring a strong dollar by Summers and Geithner did not -- and we might not find ourselves in the position Britain was in after the second World War. Indeed, the Chinese might be so dependent on access to our markets to keep their economy growing that power will lie on our side of the bargaining table.

[OregonJames]

We spend more money on our military than any nation, and our military is based in nations around the world. I believe we should shut down most of our overseas bases and invest that money within our borders to improve our nation's infrastructure and to pay off our national debt. We cannot be both the strongest nation in the world and at the same time be the greatest debtor nation in the world.

[stuart-johns2]

I wonder if anyone knows what is the CORE of America's problems? I mean the heart of the matter. Not a residual problem. What is REALLY wrong with America?

[noloyalisti]

Obama is just having to clean up the garbage and poop the Bush Crime Family left him. Of course the REAL problem are the big corporations that run the United States. Until we admit that we will have idiots blaming Obama and blaming the government. I wonder when the Sheeple will get a brain.

[poorsoldier]

Lenin once said capitalists will sell them (the communists) the rope they hang us with. He was wrong, capitalists will pay them to make the rope they hang us with.

[jackp32]

Oh!Bama is leading the U.S. into the turd world nation group.

[babooph]

All the skyscrapers are now overseas-the Empire State is a small relic-all built by foreign companies & engineers-other nations send up satelites & explore space-the US has a bloated military& two lost wars-its engineers making arms-IKE WAS RIGHT-his farewell address tried to save the US but it has been too weak & corrupt !

[Ms_enza]

With 48 cents of every tax dollar going to the Pentagon, why should Wall Street feel guilty for their peccadillos? Soldiers are willing to die, but is a general willing to cut a lucrative white elephant project? Say the V-22, or any number of obsolete pigs?

The biggest cesspool of corruption has five sides.

[ark54]

people are hurting all over the united states of america, mothers/fathers, families, the backbone of the UNITED STATES OF AMERICA. the government has failed, we cant be a strong country because of washinton dc our governement has failed us. THE AMERICAN IS FULL OF GREED/MONEY/AND THAT DICTATES POLICY. you bet it does, and have no idea how the events of the past 2 years could prove me wrong

[ark54]

GOD in heaven, nothing makes sense? no not when a wall street thing gets 15,000,000,000 bailout and social security people get 1200 a month, a ceo gets 10,000,000 bonus and still a ss person gets 1200 a month with no cola! people with 2/3 brain cells to rub against each other should be able to figure this out?????????????????

[ark54]

what kills me is the headline, the perils of a debtor nation????????????????
you made it a debtor nation?????????

the federal government is trying to prepare all, because this is the age of the baby boomer, all worked and rely on social security. it is not there for us that have worked in the united states of america it is not there for us. we will have no means of support, because our governement has failed. our governement has not produced anyting at all. there will be no socail security increase, why? because 1,000,000,000 was given to wall street execs for bonus, and 700,000,000,000 bailout given to the same people getting bonuses, what makes sense here?????????????

[Stevenapoli7]

The best line in the article is when he says that Obama is trying to make us become an ordinary nation. His words and actions, or lack of action, sure do confirm that.

[jtdev1]

And I guess Bush did a better job?

[ark54]

i do not nor will ever understand why the decent people have been taxes t death to pay for a 700,000,000,000 bailout. the people on social security get 1200.00 a month and the government says that is okay no more increase. these people are the makeup of the united states of america, they are not the ceos tthey are not anythng but taxpaying americans, yet people walk away with 1,000,000,000 money. baby boomers cant get get health care, cause what has been said is that they should just die. god i am sick of this country, it use to be a great nation. it is not now. all are out the 1.00 bill, it means more than a human life. does that say anything.
that thing on a dollar bill "in GOD we trust" means nothing at all. way back when money was minted, looks like people had a good attitude and knew what GOD had intended, man what the hell happened. katie couroc/mat lauer/any thing from any tv crap, please live off 1200 am month? ss benefits, live like the rest of decent americans have to do. i am 100% assured you will not and could care in the least.
who cannot live off 70,000 a year? i think it is the 200,000,000 people making 25/30,000 a year that are taxed to death to make you get 1,000,000,000 is this fair?
trust me you are not that GOOD!

[SHEETPAN]

White House Communications secretary Anita Dunn told a high school audience that one of her favorite political philosophers is Chairman Mao. Her comment was not taken out of context. Why is CBS censoring themselves on that story? That thug was responsible for the deaths of over 30 million people. Obama refuses to see Dali Lama a couple of weeks ago while he was visiting America. The first U.S. President to do so. Is the White House occupied by China syncophants?????

[kesac4650]

China's total investment in the US is just about equal to 15% of the US housing market. It is not that big a deal or that great a story unless you want to scare the children with it.

[kesac4650]

Mr. Stelzer talks in circles and never really makes any point except that there are lots of possibilities to be considered here.
There are 145 out of 195 nations of this world who have invested in America and have for 60 years. China is one of them. There investment in the US doesn't even approach that of Japan's in the 1980's.

[SHEETPAN]

Blaming Reagan is not a very convincing argument. You need to do better than repeat tired old cliche's. The story above is about now. Not 20 years ago. When Obama took office he rightly pointed out that Bush had set record deficit's. Then he immediatly almost triple's those. The future value of the dollar and high inflation are real concerns. The more we borrow from China the more they have us by the balls. How anyone could see that being in America's favor is irrational, unless you want to see America become more like China.

[jtdev1]

Tell me why Obama "Tripled" the deficit?

Could it have anything to do with the BANK BAILOUTS set in motion by BUSH?

Take the bank bailouts out of the equation and tell me what the deficit would be...

[sjc_1]

The 2009 budget signed by Bush was $1 trillion in deficit, TARP kept it from collapsing and ARRA will keep it from sliding back into collapse, so the deficit is larger. President Obama is on the record signing the ARRA, which has added $200 billion to the more than $1.4 trillion dollar deficit. I do not see the "triple the deficit" remark as being valid.

[skyk-2009]

Just think folks BEFORE we started down this path of "Trickle Down" Economics and "Free" Trade WE were the worlds largest CREDITOR Nation! Anyone into trying out the Republican LIE again?

[noloyalisti]

We would do well to become like the "common" nations of the world and stop costly invasions and occupations for our big, rich corporations.

And on a personal level, start saving for what we buy and stop playing the credit card Ponzi scheme.

[noloyalisti]

This is what happens when we listen to a idiot like Reagan. And big corporations who just want you to have enough money so they can continue to rape and pillage We the People.

And we are just dumb enough to keep doing it for them.

[filmguy107]

True that!