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The U.S. deficit is increasingly being financed by foreign investors willing to take advantage of the higher interest rates offered by Treasury securities. This changing scenario is causing economists to debate whether America's foreign indebtedness could lead to a severe decline in the dollar and a world financial crisis.
Some analysts see no worry at all. Federal Reserve Bank Chairman Alan Greenspan believes that world financial markets are so awash in money that the U.S. can borrow much more than seemed likely in the past. He agrees that the dollar may fall further, but claims that this fall in value will be gradual. He argues that this gradual decline will benefit the U.S. economy by reducing American trade deficits as exports become cheaper and imports more expensive.
The Bush administration does not seem to be worried either. "Productivity has been remarkably high in the last few years," said deputy Treasury secretary John Taylor, "Foreigners want to invest in the United States."
Another school of thought cites the willingness of foreign governments like China and Japan to finance American borrowing. In these cases, the money is not coming from private investors but from foreign governments. Their goal is not necessarily profits, but on stabilizing exchange rates to keep their own exports from becoming more expensive.
A final school of thought includes International Monetary Fund officials. They worry that a collapse in the value of the dollar in global financial markets would send shock waves throughout the world economy. Such a collapse would severely affect Europe and Asia because they rely heavily on exports to the U.S. to fuel their own economic growth.
"There is a school of thought that the U.S. can keep borrowing forever," said Kenneth S. Rogoff, professor of economics at Harvard University and former chief economist at the I.M.F. "But if you add up all the excess saving being thrown out by the surplus countries, from China to Germany, the United States is soaking up three-quarters of it right now."
In the end, the level of the American dollar's decline will depend on all these factors. Neither Alan Greenspan nor the Bush administration are currently concerned. For Mr. Rogoff and the I.M.F., it is not a question of whether the dollar declines, but one of how soon and how far it will go. In the meantime, economists worldwide will continue to debate the outcome.
(Updated January, 2005)