Bill Costello

    “THE Ant and the Grasshopper,” a fable by Aesop, provides a moral lesson of hard work and saving. During the warm months, the ant worked hard to store food for the winter while the grasshopper sang and played. When winter arrived, the grasshopper asked the ant for food because it had none. In today’s world, China is like the ant and America is like the grasshopper.

    America tends to focus on enjoying today instead of preparing for tomorrow. This trait has led to a nation of debtors. And, like the grasshopper, America’s lack of savings could lead to its demise.

    The grasshopper’s indulgence affected only its own life and not the lives of others. In America, however, this is not the case. America’s indulgence will negatively affect future generations in the form of debt.

    While the American Dream is eroding, members of Congress fail to cut spending that would reduce deficit and debt, and thus Americans continue to sing and play like the grasshopper.

    America used to invest in the future. From highways to high-rises, it used to build things that were the envy of the world. Now Americans mostly consume.

    Meanwhile, China is busy storing food for the winter. This trait has led to a nation of creditors. And, like the ant, their savings will help them survive.

    When comparing net national savings as a proportion of Gross National Income from the mid-1990s to 2005, American savings decreased from over 5 percent to nearly zero and Chinese savings increased from roughly 30 percent to almost 45 percent.

    In Aesop’s fable, the grasshopper asked the ant for some of the food it saved but the ant refused. In the metaphor I’m using here, however, China is loaning America some of its savings — with interest, of course. In fact, China is the largest foreign lender to America.

    That the financial crisis is threatening the dollar is making the Chinese very nervous because they own vast sums of dollars. China has currency reserves of US$2.5 trillion, of which roughly 70 percent are dollar-denominated. The Chinese are exposed and will lose if the purchasing power of the dollar falls and/or the price of U.S. government bonds fall. The grasshopper’s problems now threaten the ant.

    Because America is experiencing record-high budget deficits and appears to be on an unsustainable fiscal course, the Chinese have been gradually reducing their exposure by cutting back their holdings of U.S. Treasuries and diversifying in other nations. But it is not likely they will make dramatic reductions because they need a strong American dollar.

    Kenneth Lieberthal, a senior fellow specializing in China at the Brookings Institution, recently said: “I don’t think we’re going to see any massive flight from China’s holdings of U.S. debt. That would be self-defeating.”

    However, other nations could also become nervous and reduce their holdings of U.S. Treasuries. A sustained drop of total foreign holdings would likely lead to higher interest rates and falling stock prices in America. Americans are, therefore, vulnerable to foreign lenders.

    It’s time for America to focus on preparing for tomorrow instead of enjoying today. America can no longer behave as the grasshopper. It must become the ant.

    (The author is the president of U.S.-based Making Minds Matter, LLC.)