The trade numbers say that America’s largest exports are industrial products such as refined petroleum and aircraft.
In a real sense, though, our most important exports are intangible ones: political stability and the rule of law.
Combined with our sophisticated and liquid financial markets, these characteristics make the United States uniquely suited to serve as a haven for the accumulated savings of individuals, companies and central banks from around the world.
As University of Wisconsin economist Menzie Chinn puts it, we enjoy “a quasi-monopoly on the production of safe assets, in the form of sovereign debt.” America exploits this monopoly power by selling government bonds at more advantageous interest rates than would be possible otherwise.
Congress must act soon after it returns next month to preserve that monopoly — to avert the impending exhaustion of the federal government’s legal borrowing authority, lest the United States default on any of its obligations.
This situation once again reminds us that investors all over the world rely on the full faith and credit of the United States — which is the hard-earned product of our long history as a civilized democracy whose courts can be relied upon to enforce contracts impartially.
If we couldn’t import financing so cheaply, then we would have to save more and consume less. We might have to sell other countries more aircraft, or wheat, or some other good or service that’s harder to make than a federal promise to repay.
To be sure, this is a mixed blessing. Our quasi-monopoly on safe assets tempts, and enables, the United States to live beyond its means, which can be as much of a luxury as it sounds; over time, though, it can also distort the economy.
A prudent safe-asset-monopolist nation would hedge by reducing its long-term structural budget deficits and, hence, its need to borrow. Congress has not taken such steps for decades, however, which is part of the reason that we face another debt ceiling drama just two years after the last one. Of course, foreigners’ willingness to finance the U.S. debt on easy terms reduces Congress’s sense of urgency about deficits, so it’s a bit of a Catch-22.
What’s more, as Chinn says in a new paper he presented to the Federal Reserve’s annual conference in Jackson Hole, Wyo., this month, there may be limits to the United States’ ability to curb international demand for Treasury debt, even if it does reduce its budget deficit.
As addicted as the Treasury is to bringing foreign money in, countries such as China and other emerging Asian markets are also hooked on sending it out — due to the lack of alternative havens.
Even accounting for demographics, fiscal policy and other factors, there remains a certain amount of international demand for U.S. Treasurys that can be explained only by this country’s status as a nearly unparalleled producer of safe assets, Chinn writes.
Years ago, a French finance minister labeled the dominance of dollar-denominated assets in global finance as America’s “exorbitant privilege.”
He might have characterized it more objectively as a huge international compliment — the world’s way of recognizing that, whatever else one can say about the United States, or its policies, foreign and domestic, it’s still the most reliable place to invest money you absolutely can’t afford to lose.
For all the tensions between the United States and China, for all the latter’s sometimes harsh denunciations of American trade policy, or the U.S. Navy’s maneuvers in Asia, Beijing continues to hold more than $1 trillion in Treasury securities and has been accumulating more in recent months.
Frequent predictions that the Communist government would act on its periodic ire with the United States by dumping our debt have never materialized.
The United States has to keep earning this compliment every day. And while extending the debt ceiling, as Congress will probably manage to do, is necessary for that, it is hardly sufficient.
The full faith and credit of the United States rest not on this or that grudgingly passed statute, but on a much deeper structure of consensus and cooperation, both political and social. That is to say, it rests on the very attributes of our society that seem to be under siege in the contemporary political situation.
If America ever does stop exporting political stability and the rule of law, it will probably not be due to a lack of demand, but a disruption in supply.
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