Marketplace, June 9, 2004
President Bush is hosting the 30th annual G-8 summit in the coastal resort town of Sea Island, Georgia, with leaders of the world's eight largest economic powers which together account for more than two-thirds of the world's output. With the June 30 deadline looming for turning over greater authority in Iraq to its citizens and the UN, Bush needs to mend fences with Old Europe. But there's a deeper issue that won't be discussed. To understand it, we need to go back a few years.
This week, America honors the memory of Ronald Reagan. His presidency marked a turning point in the economic and political relationships between America and its major allies. It was a new bargain: The United States would ramp up its military spending, providing a larger defense umbrella for other major powers. In return, they would help finance America's growing deficits. The Reagan military buildup arguably brought down the Soviet Union, but by the end of the 1980s the United States had gone from being the world's largest creditor to the world's largest debtor. And it is so today. Of course, as long as the dollar reigns supreme as the currency in which the rest of the world does its business, most of that debt comes free of charge.
But nothing is permanent. Two great changes are occurring in that basic bargain. First, although foreigners have continued to finance America's budget and trade deficits by buying dollars and U.S. bonds, it's starting to occur to them that these may be bad investments. The twin American deficits seem out of control. And now there's starting to be an alternative reserve currency. It's called the Euro.
The second great change is that America's military policy is not exactly to the liking of many the powers now assembled in Sea Island, Georgia. It was one thing for Ronald Reagan to intimidate the Soviet Union with America's military might. But it's quite another for George Bush to mount a preemptive war and occupation in Iraq. Some worry that America may be inviting more terrorism, rather than less.
I'm not suggesting that Ronald Reagan's bargain with the world's other major economic powers is over. But the bargain isn't as firm as it used to be. As America's militarized foreign policy grates on other major powers, they're tempted to go their own way on foreign policy. Meanwhile, as they shift more of their savings into euros, it will cost the United States more and more to run the world's largest military. We can't any longer rely on them to give us free loans by using the dollar as a reserve currency. Thus, in order to pay our bills, long-term interest rates here will have to rise -- which means higher costs to service our debts, and less money for education, Social Security, and everything else we want our government to do. At some point, Americans will no longer be willing to pay the high costs of being the world's policeman.
They won't talk about any of this in Sea Island, Georgia, this week. But you can bet it's on their minds.
