March 24, 2004
By Glenn Somerville

WASHINGTON, March 23 (Reuters) - U.S. stature as the world's leading financial power is increasingly jeopardized by mounting debts that make America dependent on Asia to fund its spending, former Treasury Secretary Lawrence Summers said on Tuesday.

ADVERTISEMENT"There is surely something odd about the world's greatest power being the world's greatest debtor," Summers said during an address to Washington's International Institute of Economics.

"There is surely a question that must be asked when, in order to finance prevailing levels of consumption, prevailing levels of investment, it is necessary for the United States to be as dependent as it is on the discretionary acts of what are inevitably political entities in other countries," he added.

Summers, now president of Harvard University, was treasury secretary in the Clinton administration from mid-1999 until the Bush administration took office in January 2001. He spoke scathingly about rising U.S. current account and budget deficits.

The United States briefly ran surpluses in the late 1990s, but now relies upon borrowing from abroad through the sale of U.S. Treasury securities to meet day-to-day spending needs.


NEED ASIA'S MONEY

Much of that money comes from Chinese and Japanese purchases of U.S. Treasuries, or government IOUs, using dollars acquired by exporting consumer goods, electronics and cars to America.

Bush administration officials argue that America is a better investment site than anywhere else in the world and say that is the reason so much Asian and other capital flows to the United States, which Summers partly conceded.

"It can be argued...that the incentive for Japan or China to dump Treasury bills at a rapid rate is not very strong given the consequences it could have for their own economies," he said.

"That is a...reason why a prudent person would avoid immediate concern," he said. "But it surely cannot be prudent for us as a country to rely on a kind of balance of financial terror to hold back reserve sales that would threaten our stability."

Summers said an approaching bulge in the number of retiring Americans, as the "baby boom" generation born after World War Two reaches retirement age, highlighted the unhealthy situation of a low U.S. savings rate that means the country must borrow to keep up its spending and investment.


DELAY MEANS PAIN

He suggested the Bush administration, which has focused on cutting taxes as deficits soar, was putting off a day of reckoning for America that will make the process of dealing with it eventually all the more painful and expensive.

"Budget deficits and debt finance are not an alternative way of financing government expenditures," he said. "They are a way of deferring tax increases or subsequent expenditure cuts at substantial cost in interest and ultimately in the allocation of national resources," Summers said.

Asked what policies he would follow if he had an opportunity to head Treasury again, Summers said: "a substantial program of deficit reduction that was in accord with what the political process would bear at that time" to reduce reliance on borrowing.

He expressed surprise there was not more widespread concern about rising U.S. budget and trade deficits and about the Bush administration's policy of covering shortfalls through borrowing.

"Maybe it'll turn out that we can rely on an emerging China and Japan to support low interest rates in the United States indefinitely, and that that's a good planning assumption," Summers. But he added: "It seems to me to be a dangerous mistake to be making in this country and...it's hard for me to understand why there isn't a broader sense of concern."

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