BIZCHINA> Backgrounder
Who will 'feed' the US?
Updated: 2009-04-01 11:38

The United States, the world's most developed country, is scrambling to answer the question "Who will 'feed' the US?" years after it had asked the most populous developing country a similar question: "Who will feed China?"

Is it sensational to ask the richest country the same question that China faced more than 10 years ago? The reply is "No." This time, it is not about "grain supply", but "capital supply" and "supply of order."

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An unprecedented financial crisis that originated in the US is shattering the world, without exception to any region. In response, the US has announced massive rescue plans to revive the economy, and is ready to roll out more such plans, yet leaving a big question mark as to how it will get enough money to finance those plans.

The US Congress sanctioned a $787 billion stimulus plan submitted by the Obama administration last month, which media reports said is only a small fraction of the overall plan.

The US-based San Francisco Business Times reported on Nov 26 that the US government and the Federal Reserve is harboring a huge $8.5 trillion rescue plan, or about 60 percent of the country's GDP.

US President Barack Obama is expecting a record $1.75 trillion in federal fiscal deficit this year. The fiscal figure reached a high of $459 billion last year.

This year's deficit would account for 12.3 percent of the GDP, the highest since the World War II and far exceeding the recognized 3-percent alarm level.

In addition, Obama also foresaw an average $1 trillion in deficits each year for 2010 and 2011.

Many US experts said Obama's estimate was too optimistic, and the actual deficit would be even bigger, as the president excluded the country's liabilities in his projection.

Where does the money come from?

Who will be able to provide the financial support for the enormous fiscal deficit of the US government?

The US Treasury Department estimated the US government would issue up to $2.56 trillion of treasury bonds this year, and at least $1.14 trillion more next year.

By the end of last year, outstanding treasury bonds stood at $10.7 trillion. About 29 percent, or $2.862 trillion, is held by foreign governments or investors. That means the country's reliance on overseas investors holding treasury bonds has been raised by 10 percentage points from eight years ago.

"The world simply cannot buy any more new issuance of US treasury bonds," said Yu Zuyao, an honorary economist with the Chinese Academy of Social Sciences (CASS), who used to head the CASS Institute of Economics.

Many countries have their own hands full, like the US, using their capital to counter the financial crisis, consolidate their financial system, and fuel their own stimulus packages to revive the real economy, even though they have some foreign exchange reserves in US dollars.

Thanks to trade surpluses, emerging economies hold a combined $5.5 trillion in forex reserves, but most of the reserves have already been used to buy US treasury bonds, said Yoko Kitazawa, an expert on international affairs, in a February issue of Sekai (The World), a Japanese monthly journal.

However, trade surpluses of these regions and countries are eroding because of a collapse in global trade.

As a result, forex reserves of these regions and countries are expanding at a slower pace, or even declining. The latest forecast from the World Trade Organization said global trade may shrink by 9 percent, or more, this year.

As the largest holder of US treasury bonds and the world's second largest exporter, China had seen exports decline since November last year, with its actual use of foreign capital falling since October.

Media reports said China's forex reserves may have decreased by more than $30 billion in the first two months. China's forex reserves stood at about $1.95 trillion at the end of last year, the largest in the world.

The Xinhua-run newspaper Economic Information Daily reported this month China had liquidity of only $300 billion to $500 billion in forex reserves, citing a report from an unidentified ministry-level research institute.

Crowding out effect of US capital pool

Yang Bin, also a CASS economist, said the US was luring capital scattered all over the world to pool in the US by floating excessive treasury bonds, which could be a threat to developing countries which are crying out for capital.

Economic development in many developing countries is, to a large extent, counting on such an influx of overseas capital.

The US-based Institute for International Finance warned in January that capital flows into emerging markets are in danger of collapsing this year as a result of the financial crisis.

The association of large banks estimates that net private sector capital flows to emerging markets will be no more than $165 billion this year, which is less than half of $466 billion in 2008 and only a fifth of $930 billion in 2007.

The crisis and a global economic recession are also aggravating the world poverty. The United Nations said in a report published this month that reduced growth this year would lead to a total income loss of around $18 billion ($46 per person) for 390 million people in Sub-Saharan Africa living in extreme poverty.

The projected loss represents 20 percent of the per capita income of the poor in Africa, far exceeding the losses of developed nations.

The majority of low-income nations, or 43 out of 48, are incapable of providing a government stimulus for the poor, according to the report.

In addition, the excessive US treasury bonds, its enormous fiscal deficit, and issuance of the dollar that far exceeds the demand of the economy would drive the world nearer to inflation and a depreciating US dollar. This could be another heavy blow to the world economy in a downturn and to developing countries in particular.

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