AI: During a visit to Washington last December, at a dinner at the German Ambassador’s residence, you analyzed the state of the American economy, particularly the size and nature of its financial liabilities, and predicted trouble. That prediction looks increasingly prescient. But what actually troubles you most from a German perspective? The U.S. trade deficit? Its budget deficit? Or its private debt?
Helmut Schmidt: It is the foreign indebtedness of America that concerns me most. The trade deficit has reached 7 percent of GDP. Imports of foreign capital balance out the deficit, particularly capital flows from China, Japan and a number of other countries, including some in western Europe. That might be sustainable as long as America maintains its power and global prestige. Once that changes—and we are already witnessing some such changes due to the policies of the current U.S. President—it gets to be dangerous.
AI: What will happen should the next U.S. president prove unable to help America regain its standing in the world?
Helmut Schmidt: It is hard to conceive of an administration that will do worse on financial governance issues than the current one. An end to the current financial crisis is not in sight yet. Actually, it could get worse still. Even during their last few months, the current Administration is quite capable of committing serious mistakes. In the years following the stock market crash of 1929, virtually all governments committed grave mistakes.
AI: Why should the ordinary U.S. citizen care about debt? Historically speaking, hasn’t debt always been repaid somehow?
Helmut Schmidt: American citizens don’t need to be overly concerned yet, but Chinese, Japanese or German citizens do. Their capital accumulations, their savings, are not being used in their own countries, but in America. It would be much better if that capital were used in their own countries for research, education and other public investments.
AI: What is the relevance of the fact that the U.S. dollar is not the only major reserve currency anymore, with the growth in the prestige and value of the euro?
Helmut Schmidt: That is a healthy development. In twenty or so years we will have three global currencies. In all likelihood the U.S. dollar will remain the most important one, but the euro will be a close second, and the Chinese renminbi will be used as a reserve currency, as well. It seems as if the world is headed for a balance between these three. Not only will this lead to closer cooperation between the three central banks—there are already signs of this type of cooperation today—but it will also hopefully lead to a common approach in the regulation of financial markets.
We need that. Today we have...