Big deficits leave U.S. more
vulnerable to terror
Investors.com
By Robert. D. Hormats
Last Updated: 3/25/2005 9:25:19 AM
NEW YORK (MarketWatch) -- The current congressional debate
over the federal budget has major security implications.
In an age of terrorism, big budget deficits and heavy
dependence on foreign capital constitute a significant source of
economic vulnerability -- increasing the chances of financial
turmoil in the event of another attack.
Strengthening the country's balance sheet, on the other hand,
will make the U.S. economy more resilient, frustrating attempts
to undermine it through terrorism.
An attack on the United States now could produce much greater
financial disruption than occurred after 9/11. Before 9/11, the
federal government enjoyed a large budget surplus. That provided
flexibility to mobilize enormous sums for relief and
reconstruction, economic stimulus, war in Afghanistan, and
homeland defense, with no adverse impact on financial markets.
Foreign investor confidence and the dollar remained strong; large
amounts of capital continued to flow into the United States.
The next time could be a lot different. Three years of big
government deficits and growing debt provide less room in the
budget to respond to a new disaster. And U.S. dependence on
foreign capital has grown to record levels.
Overseas investors supply the United States with hundreds of
billions of dollars annually; in 2004 the federal government
relied on foreign central banks and investors to finance over
half of its enormous deficit -- and they now hold over 43 percent
of all Treasury bonds. Many foreigners already have become
skittish about buying more dollar securities; they could become
much more so after a new terrorist strike.
And far greater sums could be required to respond to the next
attack. Osama bin Laden has made no secret of his desire to
undermine the U.S. economy. He has boasted that 9/11 struck the
U.S. economy "in the heart," claiming al-Qaida spent only
$500,000 while the U.S. lost over $500 billion. His has
proclaimed the goal of "bleeding America to the point of
bankruptcy."
Consistent with this, some intelligence experts believe that
in the future al-Qaida, or other radical groups bent on
terrorism, will deploy weapons of mass economic disruption rather
than weapons of mass destruction. A dirty-bomb attack on a major
U.S. city might kill fewer people than 9/11 but do a lot more
economic damage -- rendering a large portion of that city
uninhabitable for decades due to radioactive contamination. That
would disrupt sizable parts of the U.S. economy, produce massive
job, insurance and business losses as well as precipitate a
plunge in investor and consumer confidence. Large numbers of
people subsequently could refuse to work or live in any big urban
area.
A chemical, radiological or biological attack on a municipal
transport system, a major port or a key rail facility would
disrupt the U.S. transportation and commuter system -- and hence
the overall economy -- for many months. (Some buildings affected
by fall 2001's anthrax attacks took more than three years to
reopen.)
A radiological attack would have an impact measured in years.
In an age of thin inventories and just-in-time deliveries of
components and raw materials, such disruptions -- particularly
with respect to a larger port such as Long Beach, Calif., or New
York/New Jersey would cause massive and prolonged dislocations
throughout the entire U.S. supply chain. Regions dependent on
fuel passing through the affected facility would be left with
critical shortages.
Billions of dollars would be required to respond to the
medical crisis and cleanup right after an attack, many more to
restore or decontaminate vital infrastructure and still more to
re-stimulate the economy. Coupled with a collapse in tax revenues
due to a plummeting economy, these costs would cause an already
massive budget deficit to swell.
Billions of dollars of foreign capital inflows could quickly
dry up. Federal Reserve Chairman Greenspan warned last year that
the enormous amount of dollars held abroad -- including 70
percent of all foreign central-bank reserves -- constitutes a
"concentration risk." He noted that "a diminished appetite for
adding to dollar balances must occur at some point."
By increasing the budget deficit and producing economic
turmoil, a new attack would elevate fears about holding U.S.
dollar assets, potentially triggering a sudden drop in capital
inflows or an abrupt withdrawal of funds. That would cause dollar
to plummet and interest rates to skyrocket, further damaging an
already traumatized economy.
These frightening scenarios are not inevitable. Significantly
and steadily reducing the federal deficit would allow more room
in the budget for any future emergency. Contingency arrangements
with foreign central banks and treasuries to counter disorderly
currency and financial markets would lessen the possibility of
financial turmoil. And establishing robust local and state
programs to ensure a quick response, rapid cleanup and prompt
rehabilitation -- all functions that now are badly under funded
-- would reduce economic disruption and more promptly restore
confidence.
The sounder U.S. finances are, the less the potential for
post-attack disorder. That would be a strong deterrent to
potential terrorists -- a signal that they cannot produce the
economic disruption they seek.
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