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China, Japan and the Underwriting of the US: How Long?

Published online by Cambridge University Press:  07 May 2025

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America's unprecedented and growing dependence on foreign capital to finance its ballooning trade and budget deficits periodically merits a piece in the business pages. Readers shake their heads, and then forget about it. Even academic economists tend to shy away from the issue, at least in print. Most recognize that a severe crisis is brewing, but they are wary of looking foolish by writing about it and then watching nothing happen in the short run. And plenty of business economists, convinced that America's deficits and their precarious financing are the pillars of a robust economy, rudely dismiss any cautions as hyperventilating. But some staunchly market-oriented analysts are worth heeding, including Morgan Stanley's Stephen Roach. During America's stock-price bubble, Roach was one of the first to bell the cat. Being a skeptic in an era of blind faith and herd instinct takes guts, but he turned out to be right. For some months Roach has been warning that the US dependence on the inflow of money from Asian central banks is showing dangerous signs of reaching its limits. He points to the increasing role of central banks as the buyer of last resort, and its worrisome parallel in the Black Monday stock market collapse of October 1987. He's warned for months (http://www.morganstanley.com/GEFdata/digests/20040823-mon.html) that a serious crisis is unfolding, especially as it's fed by such ancillary forces as skyrocketing oil prices and the erosion of trust in America. The pangloss crowd dismiss this of course, but reports indicate that Warren Buffet, the world's most savvy investor and its richest man, has already pulled his fortune out of American-dollar investments. If Asian central bankers back off too, we will all painfully relearn that - as economist Herbert Stein used to say - if something is unsustainable, then someday it will stop.

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