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Sovereign Wealth and Sovereign Power

The Strategic Consequences of American Indebtedness

Author: Brad W. Setser, Fellow for Geoeconomics

Sovereign Wealth and Sovereign Power - sovereign-wealth-and-sovereign-power
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Publisher Council on Foreign Relations Press

Release Date September 2008

64 pages
ISBN 978-0-87609-415-0
Council Special Report No. 37

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Overview

In 2000 the Council on Foreign Relations established the Maurice R. Greenberg Center for Geoeconomic Studies to examine issues at the intersection of global politics and economics. Few issues fit that description more closely than the subject of this Council Special Report. Americaís current account deficit is financed by foreign purchases of such assets as Treasury securities and stakes in U.S. firms. A good deal of these purchases today are made by the central banks and sovereign wealth funds of countries that do not share many American political values and foreign policy goals.

Some argue that this is no cause for concern. But Brad W. Setser makes a compelling case that the U.S. deficit matters for economic and strategic reasons alike. The United States may have more to lose than its creditors if they sell American assets or stop accumulating them at their current pace. This gives creditors potential leverage over U.S. policy. Setser also argues that indebtedness limits Americaís ability to influence other countriesí policies, for example through sanctions and lending arrangements.

The problems associated with U.S. indebtedness cannot be addressed overnight. But the report proposes ways for the United States to guard against the effects of a disruption in foreign financing, such as consulting with allies who hold dollars and encouraging other creditor countries to spend and invest surpluses instead of accumulating reserves. It also suggests measures to reduce the need for financing in the first place, such as working to balance the U.S. budget and, most importantly, taking steps to reduce U.S. oil imports.

Sovereign Wealth and Sovereign Power raises the potential strategic implications of U.S. indebtedness, challenging the sanguine view that global economic interdependence guarantees prudence. The report is a significant contribution to the debate on Americaís political and economic position in an age of globalization.

More About This Publication

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.

Dr. Setser has also been a research associate at the Global Economic Governance Programme at University College, Oxford, and a visiting scholar at the IMF. He served in the U.S. Treasury from 1997 to 2001, where he worked extensively on the reform of the international financial architecture, sovereign debt restructurings, and U.S. policy toward the IMF. He ended his time at the Treasury as the acting director of the Office of International Monetary and Financial Policy.

Dr. Setser is a CFR term member. He earned a BA from Harvard University, a DEA from Institut díEtudes Politiques de Paris, and MPhil and DPhil degrees from Oxford University.

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