My latest column is in the Time with the various not-left-behind kids on the cover and online here. It begins:
Over the course of this year, China’s government will find itself with more than $300 billion in new foreign-currency reserves, mostly dollars, that it will have to park somewhere. That’s in addition to more than $1 trillion already in the bank. The oil-exporting countries of the world are in a similar predicament, with a trillion petrodollars looking for a home. Japan’s got a trillion bucks lying around too.
This is the flip side of the gargantuan trade deficits ($765 billion last year) that the U.S. is running, the result of high oil prices, Asian manufacturing prowess and our spend-and-borrow mentality. That leaves exporters like China the task of figuring out what to do with all those dollars. It’s tougher than it sounds.
Consider what happened the first time the nations of the Persian Gulf found themselves in a dollar gusher, during the oil crises of the 1970s. They handed back much of that money to Western banks, which loaned it out to developing countries that couldn’t repay it. Then, in the late 1980s and early 1990s, Japanese firms recycled their dollars by investing in trophy U.S. properties, including Rockefeller Center and the Pebble Beach resort. Both those deals ended in bankruptcy for the acquirers.
This time around, Japan seems content with U.S. Treasury bonds–a dud investment, but a reliable one. China and the gulf states, though, are aiming higher. On May 20, the Chinese government said that it was paying $3 billion for just less than 10% of the Blackstone Group, the U.S.’s leading private-equity firm, which owns everything from Freescale Semiconductor to Michaels Stores. The next day, Saudi Basic Industries Corp. said it was buying General Electric’s plastics division–the storied operation based in Pittsfield, Mass., where former GE boss Jack Welch earned his stripes–for $11.6 billion. Read more.
Two people who helped clarify my thoughts yet were relentlessly cut out of the column (by me–I’m not blaming anybody else. But space was limited) were former Goldman Sachs Asia bigwig Kenneth Courtis (who now has an outfit called Next Capital Partners) and Tuck School professor Matt Slaughter. This one point was all Slaughter:
In one sense, foreigners’ buying companies is a good thing for a debtor nation like the U.S., because it’s harder to dump those investments in a panic than it is to sell bonds.
Beyond that, neither should get any blame for my conclusions or the way I jumped to them. They aren’t really conclusions, either, because I still don’t know what I think about America’s bizaare trade relationship with the world over the past couple of decades. Sometimes I’m in the Warren Buffett camp of believing that we’re impoverishing ourselves as a nation because we spend instead of save. Other times I think that if the rest of the world wants to lend us money at absurdly low rates in our own currency, then we as a nation are just taking appropriate advantage of the bizaare proclivities of others.
But I do think that last year’s big shift, in which the net investment income of the U.S. turned negative for the first time on record, was ominous. Milton Friedman once argued to me that, since U.S. income from overseas investments was greater than what foreigners earned here, we weren’t actually a debtor nation at all (our assets and liabilities were simply being miscounted). Well, nobody can argue that anymore.