Foreign Financing and The American Economy

The American economy is financed by foreign nations in ways that do not draw headlines, but do warrant further examination. Here is a breakdown of four foreign investment strategies in America and their potential objectives that many media outlets have overlooked:

1) Direct purchase of US Treasuries – This is not only for the return or safety, as many would naively assume, but to create leverage over our policies, artificially suppress our interest rates to suppress savings and keep our currency artificially strong to suppress our exports and reward consumer spending on imports.

Though these foreign countries are able to crash our currency by cutting their loans to us, which we depend on, it makes no sense for them to do that now. They need time to take all of the dollars out, but then slowly convert them into tangible assets while the dollar still has strength and is still a recognized medium for exchange.

2) Purchase of other US Assets – A massive inflow of foreign capital for acquisition of real estate, equities, and other assets has led to a net $2.6 trillion deficit in our overall international investment position – recent examples include Chinese direct financing of US subprime housing debt.

3) Continual Financing of US Trade Deficit – This investment continues to fund our massive trade deficits, causing U.S. consumption of foreign products to continue unabated which forces American industry, unable to compete with Chinese wage rates and Japan’s technology, to fold.

4) “Carry Trade” – By maintaining a near-zero short-term interest rate and maintaining an artificially low currency, Japan invites foreign borrowers in at a near zero rate which these barrowers then use to lend at higher rates – i.e. borrow at near zero in Japan and lend in Europe at +4%. This is a “no-brainer” unless the yen appreciates.

It seems billions of dollars of hedge fund capital is involved in this trade (they would be stupid not to – most hedge fund managers have downside protection because it’s mostly other peoples money). This money is then used to buoy U.S. equities, etc. The danger is however, if Japan’s currency increases by just a few percent, these trades will evaporate and billions of U.S. market value could be exposed to massive losses.

One could certainly attempt to argue that the US economy is “strong enough” to withstand elimination of any or all of these factors over a long period. However, no meaningful analysis of the performance of the US economy over the past 10 to 20 years would be complete without considering the impact of these factors.
Hopefully the media will soon take notice.