Recently, there has been much loose talk about America's borrowing abroad being a reflection of the United States' attractiveness as an investment for foreigners. Nothing could be further from the truth, given the U.S. dollar's fall of more than 10 percent against the leading currencies during the past three months and its decline of a far larger amount in the past two years. This depreciation in the U.S. currency, especially when viewed against the background of sharply diminished capital inflows from private investors, coupled with increasing inflows from foreign central banks attempting to prop up the sagging dollar, implies that the United States is seen as a risky nation in which to place funds.
The sad fact is that over the past 15 years America, in proving to be an unreliable master of the global financial system, has squandered a great resource -- namely, its franchise as the premier financial power in the world, the best name in the market, so to speak. However, this nation's financial hegemony in promoting a strong dollar had enabled America to purchase foreign goods cheaply and to attract capital from abroad at bargain rates.
We've achieved the dubious distinction of downgrading our name and, therefore, of imperiling our financial might, by pursuing inflationary monetary policies in the 1970s and by implementing in the 1980s a stimulative fiscal policy, while other industrial powers tightened their fiscal policies through tax increases and reductions in government spending. Indeed, the stimulative U.S. fiscal policy has been so far out of the mainstream since 1982 that it has promoted an expansion of domestic spending which has been 60 percent greater than that of other industrial nations over the past six years. As a consequence of these erratic and misguided policies for the past 15 years, the dollar has fallen more than 50 percent against the Japanese yen and more than 30 percent against most other major currencies during this period.
The latest example of U.S. irresponsibility is America's severe overconsumption problem, stemming from the disparity in fiscal policies in the 1980s. As a result of overconsumption, America now must borrow roughly $150 billion per year from foreigners to finance its binge in household spending which, according to my calculations, is running about $150 billion above its long-term trend. In other words, we as a nation are borrowing from foreigners to maintain a high level of consumption since, as it turns out, the share of gross national product devoted to household spending since 1986 has been at, or close to, a post-World War II record high.
Incidentally, there is no truth to the assertion advanced by proponents of the view that foreign borrowing reflects good things and that such capital inflows have been used to expand the U.S. commitment to capital spending. On the contrary, the share of GNP devoted to business fixed investment, at 11.8 percent in 1987, is practically the same as it was in 1980. Is there any wonder that foreign central banks have had to play an increasingly dominant role in financing the United States, supplying an estimated 75 percent of foreign capital needed to stem the shortfall in foreign trade in 1987, as private investors around the world thumb their noses at us?
The loss of America's franchise as the world's financial leader has three major implications. First, the United States must surrender a measure of policy autonomy. Because of the succession of irresponsible economic policies over the past 15 years, financial markets have taken a harsher view of certain American economic policies, which they regard as self-centered. As a result, our ability to undertake an independent course without punitive costs has diminished.
Second, American citizens will suffer an enormous loss of wealth. The decline in the dollar that accompanies the effective downgrading of America means that prices of imported goods, which now account for a little more than 10 percent of domestic spending, will have to rise. In fact, from current levels every 10 percent drop in the dollar will add about $50 billion to America's import bill, not just for one year but for every year in the future. Moreover, our wealth will be eroded because America will have to pay more to borrow abroad in order to compensate foreigners for investing in a fallen angel. It is not far-fetched to say that the tarnish on the nation's good name in financial circles could mean that Americans will have to pay upward of $100 billion extra per year in higher import and foreign borrowing costs, a staggering sum even in Washington.
Third, there is a risk that the American government will be forced by the electorate to adopt economic policies favoring even more consumption in a vain attempt to restore the lost wealth and to boost the lagging standard of living. Such efforts, of course, would fail because they would discourage the primary source of wealth -- investment in real capital. In the process, however, these efforts could cause further havoc in the struggle to eliminate the trade deficit.
The world will survive without the United States' serving alone as the linchpin of the global financial system, a role that most likely will have to be shared by a reluctant Japan, a hesitant Germany and a chastened United States. Moreover, it is possible that global economic growth could actually accelerate during the next decade if the movement toward reduced government involvement in economic affairs continues and if the revolution in high technology comes to fruition. Nevertheless, it will be a less hospitable place for America.
The writer is managing director and chief economist at Morgan Stanley & Co.