ECONOMICS: What's a Trillion Dollars Among Friends?
Srodes, James
REMEMBER WHEN A BILLION DOLLARS was real money. That was long ago and the time is not far off when we will start tossing around sums in the quadrillions. But still, a trillion ($1,000,000,000)...
...current account deficit of $870 billion...
...Whatever the amount or vehicle for these vast sums of dollars, they are still officially classed as liabilities to other nations...
...The Economist's handbook reports that the world economy generated $41.3 trillion in 2004, and with a 4.4 percent growth rate for the two years after that we are a global engine close to $45 trillion these days...
...Their dollar holdings may be the best thing they have going for them these days...
...cities...
...But liabilities are obligations that bind both parties...
...The argument is that Bush free-tradepolicieshaveledtomassivebalanceofpayments deficits that threaten the dollar's value and which overhang future economic growth...
...Keep in mind that the Bush administration's balance of payments deficit--the one that is supposedly unsustainable and life threatening--amounted to $688 billion last year...
...While the Bush administration is understandably and single-mindedly preoccupied with defending its military and diplomatic offensives in the multiple theaters of the war on terrorism, the Democrats who have regained Congress have multiple agendas, not the least of which is a revival of protectionist economic policies designed to reverse American leadership in a global economy...
...Did the New York Fed mean to imply that phantom money is propping up the Wall Street stock market boom, our consumer spending volume, and real estate prices and that everyone knows it?Apparently,yes.Thereportgoesontonotethatthe recent rise in world oil prices has forced other oil importing nations such as Germany and Japan to cut consumption and reduce domestic investment to keep their current account barely at surplus...
...current account deficit...
...REMEMBER BACK in the 1980s the shelf of books that were written by leftist isolationists warningusthatbecausetheJapaneseweresomuch more disciplined than we, they were going to end up eating our lunch...
...James Srodes is a former Washington bureau chief for both Forbes and Financial World Magazine and currently a weekly commentator for the BBC World Service.E C O N O M I C S 4 8 T H E A M E R I C A N S P E C T A T O R A P R I L 2 0 0 7 KeepinmindthattheBush administration'sbalanceofpayments deficit--theonethatissupposedly unsustainableandlifethreatening-amountedto$688billionlastyear...
...This was at the time when Treasury Secretary Hank Paulson was in Beijing sternly hectoring the Chinese for running up huge imbalances of surplus dollars by selling huge amounts of trade goods to the American consumeratdevaluedprices.DidPaulsonandtheChinese go into a room, close the door, and burst into laughter afterthepressconference...
...Treasury or perhaps studiously ignoredbytheadministrationforpurposesofitsown...
...Of that,theGroupofSevenmajorindustrialnationsaccount for more than $26 trillion, and of that group theUnitedStateschurnsoutGDPatanearly$12trillion pace...
...in one form or another...
...Confirmation comes from the Bank for InternationalSettlements(BIS)inGeneva,theclearinghouse fortheglobe'scentralbanks,whichreportsitcanonly account for around 30 percent of the capital outflows fromOPECcountriesforthe1999-2005period...
...Significantly but not as publicly recognized, the GCC nations are investing abroad even more money than they are spending at home...
...But the rest, the bulk, has slipped belowtheradarscope...
...Minority stakesbyGCCinvestmentgroupshavebeentaken in DaimlerChrysler, Time Warner, and Ferrari as well as landmark real estate properties in major Western cities...
...The IIF estimates their official foreign reserves rose by only $5 billion last year to $67 billion--that's about six months reserve against their import bills...
...They are not saving it, that's for sure...
...Not chump change either, but it raisesanotherquestion:Whatifthereisnodeficit,but instead, an accounts surplus that is being either overlooked at the U.S...
...With all thosedollarsoutthereinthehandsofGodknowswho, thereissupposedtobeahorrificpossibilitythatthose dollar holders will one day decide to collect on their debts, or worse, decide to dump their dollar holdings and bring our national edifice crashing down...
...But still, a trillion ($1,000,000,000) dollars is not chump change and when that amount goes missing over the periodofayearonewouldthinkthatsomeoneinWashingtonwouldnotice...
...Perhaps not...
...There is scant information on the composition and activity of these funds.AssessingGCCforeignassetholdingsisalso complicated by the blurred distinction between thestateandtherespectiverulingfamilies...
...The postSeptember11paranoiainsideCongressisinpartacoverfortheprotectionist,pro-unionethos,butyoucan't expect OPEC and Asian investment managers not to fear possible sequestration of dollar-assets in the United States when even the Bush administration has shownitselfequallyquicktofreezebankaccountsand assetsofanyoneitconsidersathreat...
...That makes the six-nation GCC group--Saudi Arabia, the United Arab Emirates, Kuwait, Oman, Qatar, and Bahrain--the 16th largest combined economy in the world, topping the Netherlands...
...But a lot of that is going through investment houses in Hong Kong, London, and elsewhere, but nearly all of it is sliding into the U.S...
...Thattranslatesascentral bank-speakfor"beatsthehelloutofuswhereit'sgone...
...They also are starting industries that will exportproductsotherthanoil...
...But what if those dollars are already back here tuckedsafelyawayinWallStreetstocks,U.S.Treasury long-term bonds, and our still solid commercial real estate market...
...dollar, whoseshareofthetotalfluctuatedbetweensixtyand eightypercentinrecentyears;theeuroaccountedfor between 12 percent and 25 percent...
...Here'shisanswer:"AyearagoIwouldhaveguessed that we could not directly account for $250 billion from the GCC countries...
...This is especially important at this point in time...
...So one keeps looking...
...Now I have to say it's up to $500billion.Andrememberthat'sjusttheGCC.Ifyou look at all the OPEC countries, plus the hot Asian economies--China chiefly--their official accounts are misstatingatleastatrilliondollars.Quiteabitisbeing wasted, of course, through corruption and bad projects...
...But why so covertly...
...Remember the uproar when a Japanese consortium bought Rockefeller Center...
...How much of it is returning to theAmericaneconomythroughthe"backdoor...
...The point was that back in 2004 when OPEC oil sold for $38 a barrel, these six countries hadGDPsof$482billion.Theyearnedthatestimated$725 billionlastyearandwillprobablypullinnearlyanother $800 billion this year...
...RememberthattheJapaneseeconomyhasbeenstuckon hold pretty much since then and that they are the last people who would try to destroy their largest single tradingcustomer...
...But the suspicion that Bush administration economic strategists are well aware that the deficit scare is a phony got confirmation in a report earlier this year by economists for the Federal Reserve Bank of New York which offered some hard numbers and interesting insights...
...But perhaps as much as $500 billion of lastyear'sandthisyear'stotalincomeisgoingabroad intoinvestments,butnooneissurehowmuchexactly or where exactly, since only Bahrain publishes its reserveaccountsandthatnotmuchcredenceisgiven to their accuracy.E C O N O M I C S 4 6 T H E A M E R I C A N S P E C T A T O R A P R I L 2 0 0 7 Iby James Srodes What'saTrillionDollars AmongFriends...
...Is that real money...
...The Fed bank estimates that the OPEC cartel alone has made confirmable foreign investmentsworth$1.3trillionovertheperiod2003-2006.Taking OPEC and major Asian countries together, the economists estimate they will see a visible flow of foreign asset purchases during 2007 of $770 billion, which, they add archly, is "not too far from the expected U.S...
...The first answer that tends to bedazzle outsiders isthattheGCCnationsarespendingspectacularsums on new cities, new military hardware, new commercial airlines, and entries into the world's tallest building contest...
...Is it a trade deficit if foreign nations reinvest their surplus in the U.S...
...One only has to look back a year or so when a UAE company called Dubai Ports paid$6.8billiontotheUKgiantP&O,whichrananumber of major port operations in U.S...
...The congressionaluproarwassointensethestartledEmirates government quickly transferred its U.S...
...operations into American hands and beat a retreat...
...Is this serious stuff...
...Again,thebulkoftheflowsitcantrackare,asthe BIS says, "...heavily weighted toward the U.S...
...But let's stick for argument's sake to the trillion dollars...
...It's time for the Treasury and Fed to chase the phantom dollars down so we can see what's at stake...
...So what one does with mysteries like this is wait untiltheotherjournalistshavefiledoutofthepressconferenceandthenbuttonholeoneoftheIIFeconomists andaskwhat'sgoingonwiththisphantommoney.How much could it be...
...The surveys from the Institute of International Finance (IIF) economists are unusually valuable in Washington because they are based on data from 360 commercialbanksinmorethan60nationsandarefree of visible spin...
...Calls by Democratic voices in Congress or on the presidential campaign trail for a radical reversal in the terms of the relations between America and its creditor-investors are surely a greater threat than we realizebecausewe--andthey--havenowayofjudging how much money is actually involved and where it is...
...SHOULD THE ADMINISTRATION be credited with a shrewd stratagem or is it simply taking advantageofthefactsofgloballife?Itmaynotmatter for the moment...
...Some investments are well known...
...PerhapstheChineseweren'tlaughing.Theymay havethefastestgrowingbigeconomythesedaysbutit is out of control, rife with corruption, ineptitude, and questionable projects that will never pay off...
...The Swiss regulators did not attempt to quantify the amount that might be involved.J A M E SS R O D E S A P R I L 2 0 0 7 T H E A M E R I C A N S P E C T A T O R 4 7 TheargumentisthatBushfree-trade policieshaveledtomassivebalance ofpaymentsdeficitsthatthreatenthe dollar'svalueandwhichoverhang futureeconomicgrowth...
...Here's how the IIF bank economists describe what's going on: "The bulk of GCC official foreign assetsareheldinavarietyofstateinvestmentfundsrun by strong teams of fund managers...
...There is another benefit to the public and phantom dollar inflows that needs considering...
...Directlyorindirectlythen,foreignofficialinvestors have been the main source of financing for the large U.S...
...Whatonehastodrawfromthatisthatwemaybe talking about more than a trillion dollars in phantom capital inflows to our economy that has been coming in for five years or more...
...The obvious first question is: What are they doingwiththemoney...
...The first glimmerings of this mystery began last summer when a think tank in Washington that represents the biggest global banks issued a report that the six big petroleum-exporting nations that make up the Gulf Cooperation Council (GCC) would probablyachieveacombinedgrossdomesticproductduring 2006 of a whopping $725 billion...
...A call to the Treasury press office produced the kind of expression of shock that Captain Reynaud (playedbyClaudeRaines)exhibitedwhenhewasconfronted by gambling at Rick's in Casablanca...
...But with America "the ultimate destination" for most of these dollar surpluses--both open and covert--the return of this capital "has allowed for higher consumption and investment spending than otherwise would have occurred...
...But it looks as if at least that sum of U.S.-dollardenominatedcashandotherformsofcapital hasrecentlycreptintotheofficialcentralbankaccounts of OPEC and Asian tiger economies into the columns called"errorsandomissions...
...With trillions of dollars involved, our creditors are more than political allies--they are stakeholders in America, especially an America locked in an indeterminate military and political struggle on which their fortunes depend as much as ours...
Vol. 40 • April 2007 • No. 3
