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NEWS & LETTERS, January-February 2004Mountain of U.S. debtTwo striking developments regarding the economy were reported this month. One was that despite the proclaimed economic "recovery,” which has seen some stock market indexes increase by 40% over the past year, almost no new jobs were created in the U.S. in December. The second was the report issued by the International Monetary Fund (IMF) on Jan. 7 that the U.S.’s massive foreign indebtedness threatens the stability of the entire world economy. These two developments are closely related. The U.S., which for two decades has been the world’s largest debtor nation, continues to suck in massive amounts of foreign capital to fund its trade deficit and federal budget deficit. This continues even as the value of the dollar continues to decline (the dollar has fallen in value against the euro by 25% in the past 18 months). The weaker dollar has the short-term impact of lowering the cost of U.S. exports, which helps explain the modest recovery in the manufacturing sector over the past several months. Yet while output and profits are up, U.S. manufacturers and other businesses are not hiring new workers because of widespread fears about underlying economic instability. These fears are well justified. As the IMF noted in its report, the amount of money owed by the U.S. to the rest of the world could total 40% of its economy in a few years. That unprecedented level of indebtedness would drive up the cost of capital worldwide and choke off investment and economic growth around the world. The IMF is not alone in worrying about the threats to global economic stability engendered by U.S. indebtedness. Some economists warn that if present trends continue, shortages in funding in the Social Security and Medicare system may amount to $40 TRILLION by the middle of the century. --Peter Hudis |
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