Do You Know What's Really Happening to this Country?
Thomas Heffner

 

The following article is a "point-counterpoint" approach to explaining why the rosy economic picture commonly depicted in the media and by politicians is well off the mark.

Well foreigners (at current exchange rates) own $13 trillion of US assets and we own $10 trillion of foreign assets. If the US $ were to depreciate by about 12% against the global basket of currencies there would be no net ownership of US assets by foreigners.

To dictate our own standard of living, defend our country, trade for goods and services that we don’t produce here, and create opportunities for our citizens, it seems we must control domestic factors of production. When foreign entities own US domestic assets, they are able to exert control over our ability to achieve these goals. We cannot replace these domestic assets or offset this control with foreign assets in foreign lands under the jurisdiction of foreign governments. A dollar of foreign assets does not equal a dollar of domestic assets. The jobs, profits, taxes, innovation, and security need to reside here – where our citizens live and work. So the net international investment position is not perhaps as relevant as the fact that foreign entities have acquired nearly $10 trillion of key strategic US assets over the past 15 years.

For these industries that are purchased (and the vast majority of foreign direct investment is for acquisition), the technology is stripped, profits are shipped overseas, and key positions are reserved for the foreign executives, graduates, and workers.

Our US household net worth is north of $55 trillion.

The household net worth – just like book value shown on a balance sheet for a corporation – is just one figure of many that may need to be examined to gain a picture of the health of an enterprise. Over the past 50 or so years, US household net worth has roughly doubled about every 10 years. In fact, the growth rate in household net worth from 1965 through 1985 is significantly higher than from 1985 to 2005.

In addition, in recent years, the assets have shifted dramatically to more unproductive, illiquid assets (such as homes), which are now valued at record multiples of cost (inflated values), and include record levels of liabilities and debts in nominal and percentage terms. This has come at the expense of domestic ownership of US treasuries (replaced by foreign sources – nearly 100% of ongoing borrowing is from foreign sources) and corporate and non-corporate equities.

Coupled with negative savings rates and an overall negative trend, the household net worth figure of $55 trillion as a barometer of total well-being is apparently worth a closer examination.

We make more money from the foreign investments than the foreigners make from their investments in the US.

Again return on investment for individual investment is only one benchmark. It would seem that we also need to insure that our domestic needs are met and secured. Witness the once vaunted US aerospace industry – one of the few remaining exports in our arsenal. According to experts in the industry, the previous generation of Boeing planes contained less than 10% of imported parts. Now the new generation 787 ("Dreamliner") will be 70% designed, engineered, and manufactured by foreigners (Russians, Italians, Japanese, etc.).

It is not hard to imagine the significance of the hollowing of our aerospace industry as symptomatic of our whole country. If in the most technologically advanced sectors, we are not able to preserve our leadership position, what hope do we have for any other sectors?

In the extreme, if 100% of our productive assets were controlled by foreign entities, we would be at their mercy to produce what we need. While today 100% of our productive assets are not controlled by foreign entities, in many key chokepoint industries, such control is nearly 100%. One does not need to control all the assets in any organization to exert significant and sometimes irrecusable control.

Our net worth is growing a lot faster than the net debt/equity that foreigners are purchasing here. If the US were a company people would say that it was in great shape: growing faster that most of its competitors and it net worth continuing to increase. That's why foreigners want to invest in the US because they see a good future. If the didn't they would put their money elsewhere. Remember each investor, each country makes independent decisions about where to invest their money. Just like you and I do.

Our net debt to equity is much higher than it was in previous periods which would suggest that given the increased risk, we ought to be producing much more to cover these increasing liabilities. In fact our growth rates and our production is significantly less than in previous periods in which we were almost entirely self-financed. Our net worth is not growing faster than in previous periods, but instead it is shifting in areas of illiquid, unproductive, and volatile sectors at the expense of ownership of productive uses of capital.

It would be one thing certainly if we were borrowing money from foreign sources to invest in operations that would yield a higher return than the cost of such funds. But as we all well know, this borrowing is going directly to consumption on consumer goods – which as a percentage of GDP is significantly higher than 30 years ago.

What can we point to that suggests that the ratio among foreign investment, exchange rates, net worth growth, and inflation will continue to be maintained given the incredible amount of foreign investment we have been receiving? In other words, one might easily argue that our current exchange rates, net worth growth, inflation rate, and therefore purchasing power is not a reason that foreign investment has been attracted to such levels but rather is a RESULT of such foreign investment.

Many people argue that the incredible present levels of foreign investment in the US are ipso facto proof that the US is on strong economic footing. The reality is that no one knows what the true cost of such foreign investment has been. We don’t know what the future value of the ownership and control of such investment will be as a gain to foreign investors and as a loss to the US. Furthermore, no one knows what will happen when these levels of investment begin to taper. It is not hard to imagine the impact it will have on our interest rates, exchange rates, and inflation.

Many argue that a devaluation of the currency under such circumstances will serve to correct imbalances. No one knows how long or how severe such a correction will be or what the new equilibrium will be on the other side. The one known quantity is that whatever economic position we now hold, it is now inextricably tied to a certain very high level of foreign investment that has never before existed in the history of this country.

One might also wonder why, with such incredible levels of foreign investment ($10 trillion over the past 15 years), the net worth growth has only proceeded at a rate marginally slower than of the past 50 years. Furthermore, why, with such tremendous investment, are our trade position, domestic ownership of US industry, real wage growth, personal savings, budget deficits, and countless other metrics receding at unprecedented rates and reaching unprecedented levels of alarm?

The key issue is for us to keep investing in Education so that we remain competitive. Incidentally, our investments in Education are not tallied as savings (they are assumed to be consumption). This is wrong. Education is an investment in the future...the same as saving money in a bank account. It is there to be used in the future.

This certainly may be true, but as a practical matter, it seems that given all of the obvious symptoms of distress we must take stock of our present situation and deal with matters that need addressed now. Prudence would seem to require that we cannot afford to rely on speculative “if-come” investments whose benefits are unknown while we lose real measurable wealth-producing industry and continue to take on massive and untenable debts. Theories like free trade and free markets are wonderful but have been proven wrong time and time again. Contrary to theoretical expectations, the more "free trade" agreements we enter into, the higher our balance of trade deficits climb. Parties who blindly subscribe to these theories are subject to exploitation by those who can amass the resources and the will to undermine and undercut the mutually agreed upon rules of engagement.

Our present public position seems to be described very well by something called the “prisoner’s dilemma.” This dilemma is faced by two prisoners who cannot communicate with each other but can chose to cooperate to minimize their loss of liberty or one can betray the other to go free at the expense of the other’s total liberty. Repeated iterations of this scenario among rational players show that the strategy of cooperation – e.g. playing by the “rules” of free trade/free market theories – is strictly dominated by the strategy of betraying the other player.

It appears that we are blindly trusting the rest of the world to care for our country as much of our country’s key resources, assets, and legacy are now in their hands. Our people are now very much serving the various whims of those foreign investors who now our landlords, bankers, producers, and employers. We seem to be the naïve prisoner playing out a strictly dominated strategy repeatedly that is enriching a small percentage of the country while the rest accumulates massive liabilities, bleak prospects, and ultimately the very same loss of liberty at stake in the prisoner’s dilemma contest.

www.EconomyInCrisis.org is a website for educating legislators and the American public about the destruction of our country's industrial base, the impact on national and economic security, and the effect on our standard of living. We publish critical but overlooked facts and figures.

We compare what led to American industrial and economic world leadership with current policies and the present crippling of our industries. We then objectively extrapolate the near-term outlook and risks for our country, businesses, and individuals.

Out of concern for America's deteriorating economic condition, the individuals responsible for www.EconomyInCrisis.org donate their expertise and time. There is no financial compensation for their participation, and they support no political organization or corporate interest.