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Can America be both a debtor and a leader?

Can America be both a debtor and a leader?
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First Published: Fri, Feb 19 2010. 01 15 AM IST
Updated: Mon, Mar 08 2010. 08 28 PM IST
It’s hard to be a moral leader to the world when you have compromised your own future through fiscal irresponsibility. But that’s precisely the problem facing the US today: Ballooning federal debt and a hollowed-out private sector threaten to render our nation a spent political force. What makes it worse is the realization that it has done this to itself.
Democracy relies on the wisdom of its citizens to select representatives who share their values and aspirations. We collectively voted for the politicians who have racked up successive budget deficits to the point where the US’ need to finance its outstanding federal debt now impairs its capacity to remain a self-determining nation.
The consequences are evident in the way the US is now compelled to soft-pedal principles to avoid offending our financial benefactors, most notably China. When President Barack Obama declined to meet the Dalai Lama last October, it was understood that US concerns over Chinese human rights violations were not worth risking China’s cooperation on other vital matters. Diplomats call this “strategic reassurance”—emphasizing political, economic and security-related issues, while downplaying more sensitive topics related to basic human freedoms.
But China’s angry response to the news that Obama met the Tibetan spiritual leader this week in Washington goes straight to the point. “If the US leader chooses this period to meet the Dalai Lama, that would damage trust and cooperation between our two countries,” said Zhu Weiqun, a Chinese Communist Party official at a 2 February press conference. “And how would that help the United States surmount the current economic crisis?”
In other words: China sees a clear link between the US’ ability to stand up for human rights and its economic interests—and Beijing isn’t afraid to exploit it. Weiqun was bluntly reminding the US to take a close look at its balance sheet before indulging in any displays of moral support for an exiled Buddhist monk deemed a “dangerous separatist” for seeking Tibetan autonomy.
China holds nearly $755 billion in treasurys—more than one-fifth of the total held by foreign nations. “China is now the largest creditor nation to the United States”, noted Victor Gao, a former top official in the Chinese foreign ministry, in a recent CNN interview. “Just imagine if China buys less of the treasury bonds or stops buying the treasury bond for a couple of months.”
Actually, China has apparently started doing just that. This week, the US treasury department reported that China had significantly reduced its holdings of US treasury securities in December. The big drop—$34.2 billion—means China has moved to second place behind Japan. The big question: will China ontinue to cut back?
Such a scenario would not be pleasant for either party. World demand for US debt instruments would take a dive, and yields would have to increase to entice new buyers, driving down the value of existing treasurys. But the very fact that such a threat might cause us to take pause in evaluating our options is sobering.
What if Russia had succeeded in persuading China to dump Fannie Mae and Freddie Mac securities, as it tried to do in August 2008 on the eve of Russia’s war with Georgia? In his memoir On the Brink (2010), former US treasury secretary Henry Paulson recounts how he learnt about the “disruptive scheme” and acknowledges that heavy selling could have created a “sudden loss of confidence” and shaken capital markets.
To remain a global leader, it must ensure its own financial viability going forward. The skittishness and volatility that continue to plague markets reflect an existential sense of insecurity arising from the nation’s precarious fiscal outlook.
Americans sense that financial woes are getting too big to surmount. They wonder at what point the nation’s seemingly unlimited appetite for government spending and increasing reliance on outside funding will begin to distort its national persona.
Can the US be a force for good when its credit rating is on a path to turn bad? According to a 2 February Moody’s assessment: “Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the Aaa government bond rating.”
It’s not only the small concessions to China over “internal” matters, or the possibility of faltering in helping allies at critical moments, that undermine the global claim to moral leadership. It’s the longer-term vulnerability to financial extortion. It’s the perception, at home and abroad, that values may be subjugated to financial considerations due to the US’ permanent state of indebtedness.
As Lech Walesa, the former president of Poland who confronted Soviet repression with demands for the right to self-govern, observed recently: “The world has no leadership. The US was the last resort and hope for all the nations. Today, we have lost that hope.” What has changed about the US role in the world? “They don’t lead morally and politically any more.”
THE WALL STREET JOURNAL
Edited excerpts. Comments are welcome at views@livemint.com
Judy Sheltonis the author of ‘Money Meltdown’ (1994) and a senior fellow at the Washington, DC-based Atlas Economic Research Foundation
Cubiclenama is off this week.
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First Published: Fri, Feb 19 2010. 01 15 AM IST