Taking Stock / Solid as a Crock

What do you think about the following economy:

* Its budget deficit has climbed to a record high in each of the last three years. In 2003 it is expected to reach 4.6 percent of gross domestic product, rising to 5 percent in 2004.

* Its balance of payments runs at a tremendous deficit, and is also slated to reach 5 percent of GDP this year. Nobody has the slightest clue when the deficits will be eradicated.

* Its national debt has been ballooning even faster, much faster, and since its citizens do not save much, it is financed mainly by foreign investors. About half its debt is held by foreign investors, mainly other governments.

* It has been rapidly shortening the duration of its debt in recent years. In 1998, the average term of the bonds it sold was seven years. This year, the average was down to 2.5 years.

l Its government expects to continue borrowing massively in the years to come, to finance its gargantuan deficits.

l Its central bank injects money into the marketplace at frightening speed, through rapid interest rate cuts, in an effort to stimulate the economy.

l The country's reputation has been suffering in recent years because of its military actions.

Hah. You thought we were talking about Israel, didn't you? But actually, our balance of payments isn't that high. And most of our government's debt is held by locals, not foreign governments. No, the country in question isn't Israel.

If we told you that it was a South American country, or maybe a southeastern Asian one, you would probably think that the International Monetary Fund should be called in to intervene.

But the country in question is none other than the United States of America, which has the biggest and strongest economy in the world, the economy that sucks in the most foreign investments in the world and that has become the very emblem of success itself. And yes, it's the only country that can mint dollars.

Your huddled masses of money

Here are a few more statistics. America's president reported in October that the federal deficit will run to $374 billion in 2003. Compare that with the budget surpluses achieved in the second half of the 1990s.

The worse news is that after three tax cuts and heavy spending on invading Iraq, the federal deficit is expected to soar to half a trillion dollars in 2004, or $500,000,000,000 if you have difficulty visualizing big numbers. Moreover, it's expected to stay there in the foreseeable future.

How will the government finance deficits like that? By issuing bonds. America's economy and the dollar still enjoy special status in the world marketplace. Despite the low interest on the dollar, its vehicles are still in demand.

How does the American economy finance its huge balance of payments shortfall? By importing ever-increasing amounts of capital. Investors hailing from Japan, Germany, France, China, Switzerland and England have been methodically and consistently buying up chunks of the American economy, through government bonds, corporate shares, real estate and factories.

The result is that for the first time since the World War II, there is a negative gap between the American economy's income from its investments elsewhere, and income by foreign investors from their investments in America. More profits are leaving the U.S. than entering.

These numbers are frightening. Yet to give another number, the American economy grew by 7.2 percent in the third quarter, and is expected to end 2003 with 4 percent growth. Most economists worldwide agree that America has left the 2001 recession behind, and is on a new path.

There seems to be a contradiction here. To resolve it, two possible explanations come to mind.

One is that the American economy is the most competitive and efficient around, as is evinced by American productivity, which is not only the highest in the world (except for Ireland), but which continues to grow rapidly.

By that line of thought, the flow of foreign investment into America is natural. And as long as America remains the most competitive, powerful economy in the world, it can continue financing its terrific balance of payment deficits while ultimately reducing its federal budget deficits.

The second possible explanation is that the American public continues to ignore the warning sirens and is stepping up consumption again.

It is doing so in its favorite way, through credit cards and growing mortgages, relying on a frothy real estate market in which asset prices continue to climb.

By that line of thought, the engine driving the impressive rally from the slowdown isn't only America's productivity and efficiency, it's the leveraged economics led by George Bush and his 280 million consumers. Federal spending keeps rising, as does private consumption, through borrowing.

Which begs the most burning question on the global economic agenda today - how long can America sustain this method, in which its government and consumers eschew savings, while the rest of the world finances investment in its economy? When will these foreign investors start demanding higher interest rates on the bonds America issues? When will the Federal Reserve kick up interest rates again?

As the recovery of the American economy and capital markets are key to Israel's economic recovery, we have very, very good reason to wonder.