14 02 2008

This story explains what happened to the US’s formerly dominant position in the world economy–a gathering storm of unbalanced balance-of-payments ratios, imported oil, exported manufacturing capacity, and good, old fashioned, economic flim-flam:

But here’s why the trend is troublesome, and more so now than ever. According to the Bureau of Economic Analysis, the rest of the world currently owns way more of America (stocks, bonds, real estate, etc.) than America owns of the rest of the world, by a margin of $2.6 trillion (as of year-end 2006; a 2007 figure is due in July and will be larger). Net foreign ownership is increasing very rapidly; it has multiplied by a factor of five in just the past decade. As it grows, we must send more dividends and interest to foreign owners, giving them more money with which to buy more U.S. assets, earning more dividends, and so on.

This compounding effect is small when net foreign ownership is low, but at today’s levels the effect is becoming significant and ever harder to reverse. Where it leads is grim: As a nation we eventually cease to be capitalists and become simply wage earners. As Warren Buffett put it in a prophetic Fortune article more than four years ago, a country that goes too far down this road can be “colonized by purchase rather than conquest.”

And this story explains the “falling domino effect” that is wreaking havoc with America’s, and ultimately the world’s financial markets, and will be making America’s assets–not just corporations, but real estate–too cheap for dollar-heavy foreigners to resist:

Even your amateurish correspondent here at OTM could see it coming a few years ago:

As we discussed yesterday, the entire system is built on a series of incentives to obfuscate or hide risk and then pass the risky asset on to the next player.

  • The borrower lies about income and creditworthiness, hiding the true risk.
  • The broker happily goes along, otherwise the loan won’t fund and he won’t get paid.
  • The lender goes along in order to reap a fat profit from selling the loan to Wall Street.
  • The ratings agencies go along in order to earn their fat fees for masking risk-laden debt with a AAA rating.
  • Wall Street goes along to sell the bundled loans and derivatives constructed from the loans to investors seeking a “safe, AAA investment.”
  • Traders and sales reps distribute the asset as “safe” around the globe in order to reap huge commissions/trading profits.
  • Politicians look the other way as Wall Street ponies up big-bucks contributions.
  • The Mainstream Media gloss over the layers of risk so as not to offend their big-bucks real estate/banking advertisers.
  • These incentives to cloak the true risks of loans aren’t just built into the home mortgage market–they’re built into all loans which have been bundled and sold as “low-risk”: student, auto, commercial real estate, corporate buy-outs, you name it.

    Meanwhile, Congress and Mr. Bush have fallen all over each other trying to print up $600 to send each of us.  They are encouraging us to shop with it, which will send 90% straight to China, rather than pay off debts with it.  Hey, if that kind of money will get you significantly out of the hole you’re in, you’re not in much of a hole!

    Kudos to Nashville’s ordinarily complacent Jim Cooper, who was the only member of the Tennessee delegation to have enough sense not to vote for this foolishness.  It should have been laughed off the floor.




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