No laughing matter for East Asia
Neither a borrower nor a lender be. Shakespeare's words might seem framed for a pre-capitalist, unglobalised world. Casting doubt on the merits of the mechanisms that keep savers and spenders in balance - in a city of bankers - may seem like anathema. But financial crises are all about the breakdown of mutual interest between borrower and lender. Generally, the lenders come off the worst: witness the winners and losers - the banks, and the governments that bailed them out - from the Asian crisis.
So it is worth thinking about the likely evolution of the relationship between the world's largest debtor, the United States, and its creditors, who are mostly in East Asia. In itself, that debt may seem to be no problem. As the world's largest economy, the US may be able to use savings more effectively than others - at least, that is the explanation often given for its borrowing binge.
But it is also worth remembering the old adage that if you owe the bank a million dollars you have a problem; but if you owe a billion, the bank has the problem. Substitute the monetary authorities of Japan, mainland China, Taiwan, Hong Kong and Singapore for 'bank', and the issue becomes clear.
Should they continue to keep increasing their loans to maintain the value of their existing assets? Or should they take a hit now rather than risk an even bigger one later? So far, these lenders have been acting rather like mainland banks in the era before write-offs and asset-management companies. In common language, that is called 'throwing good money after bad'.
Everyone knows that the American borrowing binge must end sometime. But it is easy to assume that need not happen for several more years. Given its reserve currency position, the potential for the US to go on printing dollars that the world will accept is enormous.
But a look at the statistics might reasonably send shudders through the lenders. The US Federal Reserve recently published its quarterly 'Flow-of-Funds Accounts' report for June 30. It said that as of June 30, America owed the world a net US$5.17 trillion - up from US$4.85 trillion at the end of last year and just US$612 billion in 1990.
More striking still is the reliance on foreigners to take up new US Treasury issues. Last year, non-Americans accounted for 98 per cent of net purchases of US Treasury debt and 89 per cent of the debt of government agencies. The pace of foreign acquisition of US assets has moderated slightly this year, but foreign ownership continues to rise.
The US appears to be in big trouble, and in one way, it is. A debt-buyer's strike, sparked by concern at the size of the federal deficit, could mean a spike in bond yields that could not be offset even by the continuation of an easy-money policy by the Fed.
But the foreigners have a bigger problem. Their US assets are mostly short-term debt securities. Any failure to keep buying, let alone sell, would cause a steep fall in their value, and probably in that of the dollar.
The US, on the other hand, owns little of the debt of foreigners but a lot of foreign equity. Hence, the easiest way for it to improve its international balance sheet would be for the US dollar to fall sharply against Asian and European currencies. That would strengthen the value of US assets overseas, and ease its own debt-service burden by increasing the flows of dollar dividends to the US.
Devaluation of US debt in one way or another seems not only an almost inevitable outcome but even a desirable one - at least for those who have not been foolish enough to buy that debt in the name of currency stability and dollar pegs. In the short run, we all seem to win from dollar-debt buying. In the long run, the borrowers will have the last laugh.
Philip Bowring is a Hong Kong-based journalist and commentator
