the 1990's I spent much of my time focusing
on economic crises around the world - in particular,
on currency crises like those that struck
Southeast Asia in 1997 and Argentina in 2001.
The timing of such crises is hard to predict.
But there are warning signs, like big trade
and budget deficits and rising debt burdens.
there's one thing I can't help noticing: a
third world country with America's recent
numbers - its huge budget and trade deficits,
its growing reliance on short-term borrowing
from the rest of the world - would definitely
be on the watch list.
not the only one thinking that. Lehman Brothers
has a mathematical model known as Damocles
that it calls "an early warning system to
identify the likelihood of countries entering
into financial crises." Developing nations
are looking pretty safe these days. But applying
the same model to some advanced countries
"would set Damocles' alarm bells ringing."
Lehman's press release adds, "Most conspicuous
of these threats is the United States."
let's run through some reassuring counterarguments.
economists are very good at devising models
that would have predicted past crises, but
each new crisis tends to happen where and
when they didn't expect it. So even though
our budget deficit is bigger relative to the
economy than Argentina's in 2000, and our
trade deficit is bigger relative to the economy
than Indonesia's in 1996, our experience needn't
be the same.
nasty crises in third world countries have
a lot to do with the fact that their debt
is in foreign currency, usually dollars. As
a result, when the peso or the rupiah plunges,
debts explode while assets don't, and balance
sheets collapse. By contrast, thanks to the
special international role of the dollar,
America's burgeoning foreign debt is in our
financial markets are generally willing to
give advanced countries the benefit of the
doubt. Even when an advanced country seems
to be deep in a financial hole, lenders usually
assume that it will somehow find the resources
and political will to climb back out.
is America safe, despite its scary numbers?
world countries typically suffer from institutional
weaknesses. They have poor corporate governance:
you can't trust business accounting, and insiders
often enrich themselves at stockholders' expense.
Meanwhile, cronyism is rampant, with close
personal and financial links between powerful
politicians and the very companies that benefit
from public largesse. Luckily, in America
we don't have any of these weaknesses. Oh,
wait. . . . (Isn't that all history? No. According
to The Wall Street Journal, we are again hearing
warnings that "optimism is based on massaged
there's no question that the U.S. has the
resources to climb out of its financial hole.
The question is whether it has the political
is now a huge structural gap - that is, a
gap that won't go away even if the economy
recovers - between U.S. spending and revenue.
For the time being, borrowing can fill that
gap. But eventually there must be either a
large tax increase or major cuts in popular
programs. If our political system can't bring
itself to choose one alternative or the other
- and so far the commander in chief refuses
even to admit that we have a problem - we
will eventually face a nasty financial crisis.
crisis won't come immediately. For a few years,
America will still be able to borrow freely,
simply because lenders assume that things
will somehow work out.
at a certain point we'll have a Wile E. Coyote
moment. For those not familiar with the Road
Runner cartoons, Mr. Coyote had a habit of
running off cliffs and taking several steps
on thin air before noticing that there was
nothing underneath his feet. Only then would
will that plunge look like? It will certainly
involve a sharp fall in the dollar and a sharp
rise in interest rates. In the worst-case
scenario, the government's access to borrowing
will be cut off, creating a cash crisis that
throws the nation into chaos.
know: it all sounds unbelievable. But would
you have believed, three years ago, that the
U.S. budget would plunge so quickly from a
record surplus to a record deficit? And would
you have believed that, confronted with that
plunge, our leaders would offer excuses rather
Use Notice: This site contains copyrighted material
the use of which has not always been specifically authorized by the copyright
owner. We are making such material available in our efforts to advance understanding
of environmental, political, economic, democratic, domestic and international
issues, etc. We believe this constitutes a 'fair use' of any such copyrighted
material as provided for in section 107 of the US Copyright Law. In accordance
with Title 17 U.S.C. Section 107, the material on this site is distributed without
profit to those who have expressed a prior interest in receiving the included
information for research and educational purposes. For more information go to:
If you wish to use copyrighted material from this site for purposes of your own
that go beyond 'fair use', you must obtain permission from the copyright owner.