Sell-Off of American Assets to Finance the Trade Deficit

November 28, 2007

Here’s just one small example of how American assets are sold off to finance the trade deficit:

http://money.cnn.com/2007/11/27/markets/sovereign_funds/index.htm?section=money_mostpopular

Abu Dhabi’s state investment fund has come to Citigroup’s “rescue” with an infusion of $7.5 billion for which, in return, Abu Dhabi acquires 4.9% ownership of Citigroup (on top of whatever ownership they already have).  Everyone is happy that another rug has been found under which the trade deficit problem can be swept.  No one questions what will happen when there are no more American assets to sell off.  

The relationship between this deal and the trade deficit may not be apparent, but it works like this.  (1) Americans spend money on foreign goods.  (2) The flow of dollars into and out of the U.S. has to balance.  Therefore, there must be a corresponding inflow of cash from foreign countries to finance the trade deficit.  (3)  Those countries then invest the dollars they’ve received for their exports in stocks and bonds in the U.S.  In this case, Abu Dhabi chose to buy part of Citigroup.

The relationship can be viewed from another more subtle perspective.  (1) With the loss of manufacturing jobs, worker compensation and household finances have been in a 3-decades-long decline.  (2) The average American family now finds that it must resort to loan terms it can’t really afford in order to purchase an average home.  (3)  Such families then default on the loans.  The banks then run short on cash and have to raise money.  (4) Foreign entities then step in with money and obtain partial ownership in return. 

No one asks the question “What happens when America has nothing left to sell?”  No one knows, but it’s conceivable that, at that point, the global economy will grind to a halt.  Certainly, as that point is approached, it will become ever more difficult for institutions to find financing because American assets will become more worthless and foreign investors will want higher returns.  It kind of sounds like the “credit crunch” and the falling dollar situation that we find ourselves in right now, doesn’t it?

The only long-term solution to this situation is that America must find a way to balance trade.  A tariff structure indexed to population density is the only way to accomplish that.

Pete

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