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| Author: | Brad W. Setser, Fellow for Geoeconomics |
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September 9, 2008
Council on Foreign Relations
"The United States’ current reliance on other governments for financing represents an underappreciated strategic vulnerability…The longer the United States relies on central banks and sovereign funds to support large external deficits, the greater the risk that the United States’ need for external credit will constrain its policy options,” says a new Council Special Report, Sovereign Wealth and Sovereign Power. It says reducing this dependence on foreign governments should be an important priority for the next president.
Although some argue that this is no cause for concern, CFR Fellow for Geoeconomics Brad Setser says the United States deficit matters for strategic as well as economic reasons. Setser also warns that nations that do not share U.S. political values and policy goals could use large holdings of U.S. assets as political and economic leverage. "This does not mean foreign creditors are certain or even likely to use their financial assets as a weapon. It does mean that they could do so if they want," says Setser.
Setser recommends ways for the United States to guard against the effects of a disruption in foreign financing, such as consulting with allies who hold dollars, supporting policy changes abroad that would reduce the buildup of assets in state hands, reducing the U.S. budget, and most importantly, taking steps to reduce U.S. oil imports.The report's recommendations include:
Full text of the report, including recommendations, is available on the CFR’s website at www.cfr.org/sovereign_wealth
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Brad W. Setser is a fellow for geoeconomics at the Council on Foreign Relations (CFR). He most recently was a senior economist for RGE Monitor, an online financial and economic information company. In 2003, he was an international affairs fellow at the Council, where he wrote, with Nouriel Roubini, Bailouts or Bail-Ins: Responding to Financial Crises in Emerging Markets (Peterson Institute), a book examining International Monetary Fund policy toward crises in emerging market economies.
Council Special Reports (CSRs) are concise policy briefs that provide timely responses to developing crises or contribute to debates on current policy dilemmas. CSRs are written by individual authors in consultation with an advisory committee. The content of the reports is the sole responsibility of the authors.
The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher dedicated to being a resource for its members, government officials, business executives, journalists, educators and students, civic and religious leaders, and other interested citizens in order to help them better understand the world and the foreign policy choices facing the United States and other countries.
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