Of Debtors and Creditors

By Henry C.K. Liu, 13 April 1999

Everyone knows that America has become the world's biggest debtor nation and Japan has been the world's biggest creditor nation.

America owes Japan around US$2 trillion. At the end of the third quarter of 1998, 33% of US Treasury securities were held by foreigners, up from just 10% in 1991. 30% of foreign assets are U.S. government bonds ($1.5 trillion), and 12% corporate bonds.

Yet Japan needs U.S. investment and credit. The US economy has been booming for 9 years while during the same time the Japanese economy have been sliding downhill. There are many well known factors behind this strange reversal of basic economic logic.

One factor that seems to have escaped the attention of economists is the American private sector's ability to use debt as capital that generates returns that not only can comfortably carry the cost of debt service but also to conflate asset values with astronomical p/e ratios.

Japan has been cursed with an opposite problem. It has been unable to utilize its abundant sovereign credit to back its private investment needs. As a result, Japan looks to international capital (mostly from the US), money that really belongs to Japan. The latest moves towards zero interest rates have temporarily helped the Tokyo equity market but whether it represents a sustainable recovery is still very much in doubt.

U.S. investors and lenders require an American style transparency and a degree of control that is incompatible with Japanese social requirements. American managed Japanese funds want only to make investments based on economic rationality rather than on Japan's keiretsu relationships. The intrusion of American managed capital would cause the very social chaos that Japanese politicians badly want to avoid.

This holds true in lesser degrees throughout much of Asia, including China. Asia is unable to attract sufficient global capital to sustain its growth/recovery targets, unable to restructure its economies to generate that capital domestically, and unwilling to allow an uncontrolled influx of American managed global capital on American terms.

Politically, Asian leaders are trapped between the economic demands of a global system and indigenous social traditions. They face a policy paralysis resulting from conflicting pressures. Inefficiencies continue, recovery aborted by externally imposed economic realities, and social tensions reach boiling points.

Asian solution will come from creating Asian institutions to supplant the unresponsive global institutions within which Asian economies are increasingly put at a competitive disadvantage. Grass root resistance to American demands for trade liberalization will force Asian leaders to seek Asian regional solutions, perhaps a yen based currency regime with an Asian Monetary Fund.

Kosovo has started a world-wide review by all governments of the American post Cold War geopolitical agenda that will add fuel to the economic resistance of American led globalization.