Global investors finance the leveraged borrowings of our U.S. Treasury at about 30% on a quarterly basis. While the quarterly refunding is always monitored closely to see the level of foreign investors, it masks the true level of global participation. If you add the GSE’s [Government Sponsored Enterprises,(FNMA, FHLMC, FFCB, FHLB, etc.) ] together with corporate bond issuance, the overall investment participation by foreign investors is indeed impressive. Why are so many global investors enamoured with U.S. debt obligations, as opposed to say South American debt? I’m glad you asked that question.
First of all, America has a stable government, stable interest rates with a strong central bank, and a revenue source that appears unstoppable: the American taxpayer. Without the wealth in America, created through our free enterprise system, we would have none of that. Private ownership and wealth create stable government. Our Republic has been at it for about 230 years now with outstanding results. Without it you have…well, rioting in the streets, military coups, currency that trades on appointment, and extreme poverty where children are literally dying every five minutes. You have Mexico, or much of South America, or even worse, Africa.
Second, America pays their debt obligations and often everybody else’s. America even forgives defaults at the World Bank level. We’re the world’s good bankers. Suffice it to say that everybody may not like us, but they like our credit rating. Stop me if it sounds like I am describing Exxon.
Third, what is happening is something called “positive carry”. We not only finance, we trade with the world. Americans have the luxury, now increased exponentially with the arrival of the internet, to buy the cheapest goods available for sale. We import more than we export, unless you are tracking services, which are nebulous and difficult to track, but which nevertheless belong in the export/import discussion. The world is competing for our dollars. But it is also a world competition for intelligence and innovation we are part of. So far, we are the leader. When other nations and investors trade with us, they also take on currency risk, and investing in U.S. debt is a “positive carry” for many manufacturers and central governments looking to mitigate their currency risk in the ongoing process of a trade. In other words, from their standpoint it’s cheap hedging. And they get to keep the interest.
What global isolationism (i.e., Democratic Senator Chuck Schumer’s current proposal to tax imports from China) does is hamstring what is already turning the U.S. economy. Countless U.S. corporations now have operations in foreign countries. Much of our labor is now off-shored, where it is much cheaper. This has understandably caused both confusion and consternation on the part of many Americans. They feel that America is “losing jobs” (though that isn’t the case), and they are alarmed when they hear about our “trade deficit”. Businesses which are expanding sales across the globe, such as Wal Mart, are taking political pressure, some of it coming from conservatives, for simple good business plans that add value to their shareholders. Thinking that way is not capitalism. It’s isolationism, and you can’t have it both ways.
by Smart
PS: Isis has related comments here.
Smart and Final Isis 
October 28, 2006 at 3:09 am |
Smart’s concluding paragraph said:
“What global isolationism (i.e., Democratic Senator Chuck Schumer’s current proposal to tax imports from China) does is hamstring what is already turning the U.S. economy. Countless U.S. corporations now have operations in foreign countries. Much of our labor is now off-shored, where it is much cheaper. This has understandably caused both confusion and consternation on the part of many Americans. They feel that America is “losing jobs” (though that isn’t the case), and they are alarmed when they hear about our “trade deficit”. Businesses which are expanding sales across the globe, such as Wal Mart, are taking political pressure, some of it coming from conservatives, for simple good business plans that add value to their shareholders. Thinking that way is not capitalism. It’s isolationism, and you can’t have it both ways.”
Some comments, if I may.
1. It is deeply troubling when persons in leadership positions, such as Senator Schumer, are so narrow minded that they pursue limitations on the flow of product from China at a time when it is vitally important that China be invested much deeper in the world of international trade. What is happening is that China is beginning to think and act like capitalists. Profit is not a dirty word, but to obtain profit one must shift from a contentious attitude to one of cooperation.
A major effect of their change in attitude is that the Chinese are showing signs that they realize the benefits of communication and cooperation, as opposed to the paranoia that we see in closed societies such as North Korea, and what was the Soviet Union.
2. It is easy to understand the anxt many Americans feel at the prospect of “losing jobs” to low cost labor in other nations, of which China is one. IMO, the concern there is misplaced in its focus on jobs. Rather, Americans should be concerned about the potential that they will not be able to compete in the world marketplace because the U.S. is, in fact, a high cost economy.
An example of high cost economic deterioration is the EU, which is burdened by the high costs of government, entitlements, and benefits such as time off work.
The challenge, therefore, for the U.S. is to continue to make significant improvements in productivity levels, thereby reducing per unit costs of products. U.S. automakers and their labor forces have a long way to go in mastering higher levels of productivity for each unit of production, given their apparent inability to compete effectively against the likes of Toyota and Honda.
3. Finally, adding value for shareholders/owners is an essential goal for any business. However, with the shift of so much manufacturing outside the U.S. to other countries, one wonders about the diminished creation of value that obtains when a national economy shifts too far in the direction of retail, services, government and social programs and away from the inherent and fundamental creation of value that flows from a solid manufacturing base.
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These are just some thoughts from an old retired bean counter. I welcome the views of others on the points made, since I suspect I may just learn a thing or three.
Pedro
November 5, 2006 at 7:29 am |
I am not familiar with Senator Schumer’s proposal. So I won’t comment on it.
However, I suggest you are confusing capitalism with pure free markets. The latter, IMO, is neither attainable nor desirable. Nor in it’s absence will we become socialists.
Until China lets their currency float, adopts and enforces pollution laws, moves towards labor laws that allow non-state controlled labor unions and otherwise gets to a more level playing field, appropriate sanctions should be considered. As far as I know China’s only comparative advantage is low cost labor. I am unaware of any products designed, engineered and manufactured by the Chinese that are of value in the world marketplace.
BTW, just so you know, I’m an independent centrist with a traditional viewpoint. I’m also a capitalist but 100% American. I also have no trust in other nations believing instead that they all exist to serve their own interest and citizens. China, for example, is on record stating that floating their currency is not in their best interest.
November 5, 2006 at 7:44 am |
Ooops. delete “sanctions” and replace with “tariffs”. Must be all the talk about Korea and Iran that are occupying my mind.
June 30, 2015 at 5:10 am |
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Why You Can’t Say You’re a Capitalist and Be an Isolationist | Smart and Final Isis