THE United States is scrambling to answer the question "Who will 'feed' the US?" years after it asked the most populous developing country a similar question: "Who will feed China?"

This time, it's not about "grain supply," but "capital supply" and "supply of order." An unprecedented financial crisis that originated in the US is shattering the world.

In response, the US has announced massive rescue plans to revive the economy. The US Congress sanctioned a US$787 billion stimulus plan submitted by the Obama administration last month, which media reports said is a small fraction of the overall plan.

The San Francisco Business Times reported on November 26 the US government and the Federal Reserve are harboring a huge US$8.5 trillion rescue plan, or about 60 percent of the country's GDP.

US President Barack Obama is expecting a record US$1.75 trillion in the federal fiscal deficit this year. The fiscal figure reached a high of US$459 billion last year.

This year's deficit would account for 12.3 percent of the GDP, the highest since the World War II and far exceeding the recognized 3-percent alarm level.

Who can help?

Who will be able to provide the financial support for the enormous fiscal deficit of the US government? The US Treasury Department estimated the US government would issue up to US$2.56 trillion of treasury bonds this year, and at least US$1.14 trillion more next year.

By the end of last year, outstanding treasury bonds stood at US$10.7 trillion. About 29 percent, or US$2.862 trillion, is held by foreign governments or investors.

"The world simply cannot buy any more new issuance of US treasury bonds," said Yu Zuyao, a honorary economist with the Chinese Academy of Social Sciences (CASS), who used to head the CASS Institute of Economics.

Due to trade surpluses, emerging economies hold a combined US$5.5 trillion in forex reserves, but most of the reserves have been used to buy US Treasury bonds, said Yoko Kitazawa, an expert on international affairs, in a February issue of Sekai (The World), a Japanese monthly journal.

However, trade surpluses of these regions and countries are eroding because of a collapse in global trade.

As the largest holder of US Treasury bonds and the world's second-largest exporter, China had seen exports decline since last November, with its actual use of foreign capital falling since October.

Media reports said China's forex reserves may have decreased by more than US$30 billion in the first two months of this year. China's forex reserves stood at about US$1.95 trillion at the end of last year, the largest in the world.

The Xinhua-run newspaper Economic Information Daily reported this month China had liquidity of only US$300 billion to US$500 billion in forex reserves, citing a report from an unidentified ministry-level research institute.

Yang Bin, also a CASS economist, said the US was luring capital scattered all over the world to pool in the US by floating excessive treasury bonds, which could be a threat to developing countries which are crying out for capital.

Economic development in many developing countries is, to a large extent, counting on such an influx of overseas capital. The US-based Institute for International Finance warned in January that capital flows into emerging markets are in danger of collapsing this year as a result of the financial crisis.

The crisis and a global economic recession are also aggravating world poverty. The United Nations said in a report published this month that reduced growth this year would lead to a total income loss of around US$18 billion for 390 million people in Sub-Saharan Africa living in extreme poverty.

In addition, the excessive US Treasury bonds, its enormous fiscal deficit, and issuance of the dollar that far exceeds the demand of the economy would drive the world nearer to inflation and a depreciating US dollar.

This could be another heavy blow to the world economy in a downturn and to developing countries in particular.

"The immense US Treasury bonds bubble has not only weakened new demand among investors, but also put foreign investors in danger of seeing their dollar-denominated assets shrink in value," said Yu.

The US Treasury Department said the US government bonds held by foreign countries were down by US$4.7 billion at the end of January from a month ago. This is the first time for other countries to sell US Treasury bonds since March 2007.

China's purchase of US treasury bonds decelerated. The country purchased US$12.2 billion in treasury bonds in January, the smallest monthly increase since the second half of last year.

The US is facing a capital account deficit of US$148.9 billion, if short-term bonds are included, as foreign governments and institutions became reluctant to buy more US bonds.

More than a week ago, however, US Federal Reserve Chairman Ben Bernanke, dubbed "Helicopter Ben" for his speech about using a "helicopter drop" of money into the economy to fight deflation, actualized his threat to print more greenbacks.

He said on March 18 the Fed would purchase up to US$300 billion longer-term Treasury securities over the next six months, along with an additional US$750 billion in mortgage-backed securities.

It is the first time since World War II that the Fed has bought long-term government bonds. The Fed's decision to print more money to finance the purchase immediately led the greenback to fall against all other major currencies.

The San Francisco Business Times reported the Fed's printing press is financing about two thirds, or US$5.5 trillion, of the US$8.5-trillion of the US rescue money.

The Fed needs no approval from the Congress to start the printing press. Analysts said the Fed is left with no other option but to print, with the key interest rate staying at a record low of zero to 0.25 percent.

To dispel concerns over the US extravagance in spending, the Obama administration said it aimed to halve the country's fiscal deficit to US$533 billion in 2013. The goal is based, however, on optimistic estimation of a strong rebound in the US economy.

Swelling deficits

Over the next 10 years, the federal fiscal deficit is bound to swell as the government will have to address the structural problems of the US social insurance and medical insurance plans.

China's central bank governor Zhou Xiaochuan last week suggested the creation of a super-sovereign reserve currency that is disconnected from individual nations and is able to remain stable in the long run, to avoid inherent deficiencies caused by using credit-based national currencies.

The escalating financial crisis since the collapse in 1971 of the Bretton Woods system showed the whole world may be paying more than what it gained from the current currency system, he said.

As the world's reserve currency, about two thirds of the international trade and financial transactions are priced and settled in the US dollar.

At the core of the ongoing financial crisis are the fundamental flaws of the US economic system and the neo-liberal economic policies of US that led to tremendous trade deficit, fiscal deficit and personal credit deficit, Yu Zuyao said.

"It is not in the least a problem in US financial regulation, " Yu said. "What is needed is to overhaul the US neo-liberalist system, reform the current international financial system and restore the world's economic order."

A currency is intended to serve the economy, however, Wall Street took the lead in creating a currency-focused economy that is parallel to the real economy.

The market value of US financial assets is about US$40 trillion, but market capital has been indulged to operate in a way that makes financial derivative products spiral up to more than US$600 trillion in value, about 50 times the 2007 US GDP.

More than 97.5 percent of the world's capital in circulation is speculative capital, said Yoko Kitazawa.

In the meantime, the US has long been a supreme power in the world. The US-led developed countries are actually receiving US$3.50 from developing countries for every dollar in aid that goes to the developing countries, Yoko Kitazawa said.

Paradoxically, as the world's largest debtor with more than 20 years of consecutive years of trade deficit, the US is witnessing, at the same time, a surplus in capital account and in capital inflows.

This is a testimony to the unfairness in the international financial system and the global economic order.


Key figures

US$10.7 trillion

Outstanding US treasury bonds by the end of last year.

29 percent

Foreign governments and investors hold 29 percent of the outstanding US T-bonds.

US$1.75 trillion

US federal fiscal deficit forecast for this year.

US$40 trillion

The market value of US financial assets.

US$600 trillion

The value of financial derivatives, about 50 times the US GDP in 2007.

97.5 percent

So much of the world capital in circulation is speculative.

US$1.95 trillion

China's forex reserves at the end of last year.

US$300 billion to US$500 billion

China's liquidity of forex reserves at present.