Monday, April 6, 2009
U.S. Foreign Money Addiction Means Trouble
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NEW YORK - It's an addiction. Every day, the United States sucks in more and more of it from abroad, just to keep the nation going. We speak, of course, about foreign money.
At our current rate of trade and budget deficits, foreigners need to purchase $2 billion in dollar-denominated assets each day just to keep the dollar stable, said Axel Merk, who manages $60 million at Merk Investments and runs the Merk Hard Currency Fund.
Over half the national debt is now financed by foreigners, according to Roger Ibbotson, chairman of the financial consulting firm Ibbotson Associates in Chicago and a professor at Yale School of Management. That's been true since 1980, but the difference now, he says, "is the scale of the game."
"I guess everyone wants to keep this game going," Ibbotson said. But if one of the countries we're most dependent on drops out, it could be "like a bank run."
David Wyss, chief economist at Standard & Poor's, is also concerned. "If this money stopped coming, the dollar would take a dive and U.S. bond yields would have to come up. That would constrain capital spending and housing and slow down the U.S. economy."
Foreign investments in U.S. bonds and equities set a record in September, the last month for which data is available. Foreigners bought $1.01 trillion in U.S. securities in the 12 months ending in September, up from $866.6 billion for the same period in 2004, according to U.S. Treasury International Capital, which tracks foreign purchases of U.S. securities.
Why did foreign investors' interest in the U.S. intensify?
For one thing, investors can get a better return on U.S. bonds than they can in their home countries. Yields in the United States have been near 4.5 percent, while yields on Euro bonds are closer to 3.2 percent and yields on Japanese bonds are near 1.5 percent.
Second, our massive trade deficit has sent tens of billions of dollars abroad, as imports increased while exports declined, which has helped foreign business owners sock away plenty of dollars. And our budget deficit means the federal government keeps issuing more debt.
At our current rate of trade and budget deficits, foreigners need to purchase $2 billion in dollar-denominated assets each day just to keep the dollar stable, said Axel Merk, who manages $60 million at Merk Investments and runs the Merk Hard Currency Fund.
Over half the national debt is now financed by foreigners, according to Roger Ibbotson, chairman of the financial consulting firm Ibbotson Associates in Chicago and a professor at Yale School of Management. That's been true since 1980, but the difference now, he says, "is the scale of the game."
"I guess everyone wants to keep this game going," Ibbotson said. But if one of the countries we're most dependent on drops out, it could be "like a bank run."
David Wyss, chief economist at Standard & Poor's, is also concerned. "If this money stopped coming, the dollar would take a dive and U.S. bond yields would have to come up. That would constrain capital spending and housing and slow down the U.S. economy."
Foreign investments in U.S. bonds and equities set a record in September, the last month for which data is available. Foreigners bought $1.01 trillion in U.S. securities in the 12 months ending in September, up from $866.6 billion for the same period in 2004, according to U.S. Treasury International Capital, which tracks foreign purchases of U.S. securities.
Why did foreign investors' interest in the U.S. intensify?
For one thing, investors can get a better return on U.S. bonds than they can in their home countries. Yields in the United States have been near 4.5 percent, while yields on Euro bonds are closer to 3.2 percent and yields on Japanese bonds are near 1.5 percent.
Second, our massive trade deficit has sent tens of billions of dollars abroad, as imports increased while exports declined, which has helped foreign business owners sock away plenty of dollars. And our budget deficit means the federal government keeps issuing more debt.
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