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| A wake-up call from China |
| 2005-06-29 |
| The U.S. economy, like Blanche DuBois in A Streetcar Named Desire, depends on the kindness of strangers. Each year Americans consume more than they produce, creating a trade deficit that floods the world with dollars. Fortunately, strangers from abroad like to reinvest those dollars in the USA. The cycle works wonders. Despite the chronic overspending, American consumers have suffered few adverse consequences. In fact, all the money coming from abroad to buy Treasury bills and corporate bonds has held down the cost of borrowing. But last week, Americans got a sense of how foreign investment can also have a downside. The China National Offshore Oil Corp. (CNOOC), 70% owned by the Chinese government, offered to buy Unocal, a 115-year-old U.S. energy producer. The $18.5 billion bid raises a number of thorny policy questions. Among them: Would ceding control of a major oil company to a communist government-controlled entity pose a national security threat? And if the bid were to be blocked, would China retaliate against U.S. companies seeking to expand in China? These questions would be considered by a special national security panel if Unocal accepted the CNOOC bid. Ultimately, however, the proposed acquisition might best be viewed as a wake-up call to U.S. government leaders, who've done little to prepare the American economy for the tidal wave of competition presented by the rising economies of Asia, particularly China. China has a population four times the size of the United States' and an economy that's growing two to three times as fast. Even when it's not buying oil and gas companies, it's buying oil and gas - and other resources - driving up the cost to U.S. consumers. Demand from China is one reason oil is about $60 a barrel. Less spendthrift U.S. practices could moderate the impact of China's ascendancy. Last year, the United States ran a $160 billion trade deficit with China. That gave the Chinese a lot of dollars with which to buy pieces of American capitalism - and to raise questions like those the Unocal bid raises. Cutting the trade deficit involves revamping tax policies and other steps to encourage Americans to save more and spend less. That might sound tough. But in the long run, it's less likely to cause pain than continued reliance on the kindness of strangers. |
| Posted by:Spavirt Pheng6042 |
| #4 Ship's right, there is way too much liquidity (money looking for investments) out there and as I noted the other day risk has been discounted to zero. I read today at Bloomberg that German interest rates are lower than at any time since Bismark (was chancellor). Economic systems have a way of self-correcting which leads me to think we are going to see an unprecedented level of capital destruction. |
| Posted by: phil_b 2005-06-29 21:49 |
| #3 This is gonna sound odd to some folks, but one of the major problems facing the world is a glut of savings, capital is being formed at a rate much faster than it can be efficiently invested. |
| Posted by: Shipman 2005-06-29 13:04 |
| #2 I run a constant deficit with Publix. The only way I can cover it is by working. Which maybe can give a clue to how the US covers the trade deficit..... by creating wealth. |
| Posted by: Shipman 2005-06-29 13:02 |
| #1 In a word - Crap. There are multiple reasons why the USA can maintain a substantial trade deficit over extended periods and 'kindness' is not one of them. The most obvious is that capital generates a better return in the USA than alternate destinations. |
| Posted by: phil_b 2005-06-29 01:07 |