Monday, March 20, 2006

 

USD's Fate Increasingly Out Of Our Hands

The Associated Press reports on the foriegn ownership of US debt and assets. "The furor over efforts by an Arab company to buy U.S. port operations has focused attention on a little noticed economic fact of life: America increasingly is foreign-owned. From the ritzy Essex House hotel in Manhattan, owned by the Dubai Investment Group, to the nationwide chains of Caribou Coffee and Church's Chicken, owned by another company serving Arab investors, foreigners are buying bigger and bigger chunks of the country."

"The U.S. must borrow more than $2 billion per day from foreigners to finance its huge trade deficits. In 2005, for example, there was a record deficit of $805 billion in the current account, the broadest measure of trade."

"Foreigners already own half of the U.S. government's publicly traded debt. As of January, some $2.19 trillion in Treasury securities were in the hands of central banks, including China and Japan, and private investors abroad. At the end of 2004, the total foreign direct investment in this country, actual factories, office buildings and other tangible assets as opposed to stocks and bonds, came to $1.53 trillion, 8.2 percent more than in 2003. That investment shows up in all of the 50 states."

"European nations accounted for $977 billion, or two-thirds, of the $1.53 trillion of foreign direct investment. By contrast, Arab countries in the Middle East accounted for $9.3 billion, led by $4.7 billion in investment from Saudi Arabia."

"A bill by the chairman of the House Armed Services Committee, GOP Rep. Duncan Hunter of California, would bar foreign ownership of U.S. infrastructure deemed critical to the national security. 'To those who say this is protectionism, I say, America is worth protecting,' Hunter said. Opponents say his proposal would mean the fire sale of billions of dollars of assets now in foreign hands and end up hurting the U.S. economy."

"To the puzzlement of some economists, the current debate centers on direct foreign investment, the most stable type of investment. Yet the far larger share of foreign investment is in Treasury securities, corporate bonds and stocks. If foreigners suddenly decided to reduce their holdings of these assets, the dollar could plunge in value, interest rates could soar and stock prices could suffer a big blow."

"David Wyss, chief economist at Standard & Poor's in New York, cited the 51 percent share of foreign ownership of the federal government's debt, and that share is rising. 'That strikes me as scary,' Wyss said. 'When you make yourself so dependent on inflows of capital from the rest of the world, the question is what happens if the inflows slow down.'"

"The amount of federal debt that must be financed each year is climbing because of the budget deficits. On Thursday, Congress acted to raise the debt ceiling, the amount the government can borrow, by $781 billion, to nearly $9 trillion."

"A decline in the value of the dollar against other currencies, including China's, would help by making U.S. goods more competitive on overseas markets and imports more expensive and thus less attractive for American consumers. Falling global energy prices and stronger overseas economic growth to boost demand for U.S. exports would also help. 'A lot of things will have to come together' to reduce America's need for foreign capital, said Mark Zandi, chief economist at Moody's Economy.com."

Comments:
"To the puzzlement of some economists, the current debate centers on direct foreign investment, the most stable type of investment. Yet the far larger share of foreign investment is in Treasury securities, corporate bonds and stocks."

This is the point that is lost on most Americans. Most Americans tend to think of national security from a visceral "military" sense and not from an economic one. Foreign direct investment in US businesses isn't the issue at all, and it arguably adds to economic stability. Its the extent to which we rely on foreign purchases of treasuries that should be setting off the alarms. Foreign dollar purchases can turn on a dime leaving us extremely exposed to a downturn in the dollar.
 
Ben! Any news about Uranium today?
Mega Uranium stock rose today 29.55%.
I wonder why?
 
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