Who: Riordan Roett, Sarita and Don Johnston Professor and Director of Western Hemisphere Studies, Johns Hopkins University, SAIS
Where: Occidental, 1475 Pennsylvania Avenue, N.W. Washington, D.C., August 17, 2009
On the Menu: Poached Norwegian salmon, Pennsylvania Avenue punch, and monetary and budget discipline.
Few people can match Professor Riordan Roett’s experience observing Latin America from a choice perch in the nation’s capital. His employer, the Paul H. Nitze School of Advanced International Studies — which also happens to be my alma mater — is within walking distance of the White House. The restaurant I chose for the interview also seems appropriate. Occidental is located in the historic Willard Hotel and boasts a self-important Washington ambiance reinforced by oil portraits of a half-dozen recent presidents and black-and-white photographs of old-time influence peddlers.
Its open-air patio is across the street from the Treasury building. Sure enough, once Roett starts recounting the sorry history of post-World War II economic failure in Latin America, I can’t help noting uninspiring parallels with recent economic policies in this country.
Living above Their Means
Governments in the region, explains Roett, began by protecting domestic industries and spending lavishly on populist programs. They got cheap, easy and plentiful credit — Citibank chairman Walter Wriston famously said at the time that countries don’t go bust — which helped them avoid hard decisions even when oil prices spiked after the oil shocks of the 1970s. Latin America kept settling its rising oil bill with borrowed money and went on spending.
“Antonio Delfim Netto, who supervised Brazil’s borrowing program at the time, believed that Brazil could grow fast enough to outpace the increase in its debt burden,” explains Roett. A similar belief shaped the reasoning elsewhere in the region.
But, somehow, the borrow-and-spend mentality failed to produce solid, sustainable growth. Then, when in the late 1970s Paul Volcker’s Federal Reserve jacked up U.S. interest rates, adjustable rates on sovereign debt went up sharply and debt service suddenly became a problem. Mexico was the first country to go bankrupt in 1982, to be followed in short order by other nations in the region.
In the United States over the past decade, borrowing was not limited to the federal government, even though Washington certainly did its fair share of mortgaging America’s future. U.S. consumers also went into hock — primarily because, unlike their Latin American counterparts, they could run up credit card debt and obtain second mortgages on their homes. Just as Latin American countries during the first and second oil shocks of the 1970s, the United States kept importing more oil even as oil prices increased from around $10 per barrel in 1999 to a peak of $147 per barrel in May 2008. Americans kept on driving gas-guzzlers, charging their mounting gas bills to their credit cards. Washington also pursued populist policies, cutting taxes and encouraging debt-fueled private consumption.
Borrower of Last Resort
Since the advent of the economic crisis, the similarity between the United States today and Latin America in the 1970s has increased. U.S. households have lost their access to credit, but the federal government is now doing the borrowing for them, boosting the budget deficit in the current fiscal year to $1.6 trillion, while at the same time pursuing extremely loose monetary policy.
Just as in the case of Latin America, borrowing costs for the U.S. Treasury have been quite low. In the 1970s, international banks provided new syndicated loans to the likes of Brazil, Argentina and Mexico because OPEC countries kept earning ever-increasing surpluses and deposited their petrodollars at money-center banks, which needed to be lent out. Similarly, the financial crisis pushed up the value of the dollar as the ultimate safe haven and reduced the yields on U.S. Treasury bonds, which are still seen by cautious investors as the best protection against a possible systemic collapse.