We are living through one of the greatest transfers of wealth ever experienced. As Americans continue to live high on the hog, maintaining unsustainable lifestyles, billions of dollars each day flow out from the United States to the Middle East and countries like China and India to enable us to import foreign goods and foreign oil.
Each day, more of our collective wealth, and that of our children, is transferring to the coffers of foreign governments.
If this were a Monopoly game, we would have sold Baltic and Mediterranean Avenue long ago. Now we are even looking for buyers for our Park Places and Boardwalks—our most prestigious financial gems. What will we do when all the property is gone and the money is spent?
On Friday, the Commerce Department released a ghastly trade report on the November data. The U.S. monthly trade deficit unexpectedly surged by 9.3 percent to $63.1 billion. America’s foreign oil bill came to a record $34.4 billion. For the year, America’s trade deficit is projected to be an astounding $709 billion. That means that every day in 2007, America spent almost $2 billion more than it earned through trade.
As long as trade deficits continue, U.S. assets will continue to be auctioned off to prolong our current standard of living.
According to economic historian Niall Ferguson, “[W]e are indeed living through a global shift in the balance of power very similar to that which occurred in the 1870s.”
Ferguson draws eerie parallels between the lavish lifestyles, profligate spending habits and billowing debts of the Ottoman Turks before they fell, and those of America today. “This is the story of how an over-extended empire sought to cope with an external debt crisis by selling off revenue streams to foreign investors. The empire that suffered these setbacks in the 1870s was the Ottoman Empire. Today it is the U.S.,” he wrote.
Back then, it was a transfer of power from the East to the West, as Great Britain and other nations took advantage of the economically overextended Ottomans to purchase income-bearing infrastructure such as canals and tax streams from the sultans. The end result for the Ottomans was economic bankruptcy eventually followed by loss of empire. Ferguson notes a similar shift of power from East to West that occurred in Persia and China around the same time.
The U.S. debt crisis has taken a different form, but the end will be the same. Chronic overspending, an atrophying domestic manufacturing base, and growing trade deficits have resulted in massive international U.S. dollar stockpiles in addition to soaring national and individual debt loads.
And America’s trade partners are beginning to spend all those dollars.
“As in the 1870s, though, the upshot of this debt crisis is the sale of assets and revenue streams to foreign creditors,” says Ferguson. “This time, however, creditors are buying bank shares not canal shares. And the resulting shift of power is from West to East.”
Most recently, foreign governments have been gobbling up U.S. assets through investment vehicles known as sovereign wealth funds. The gobbling is getting fast and furious.
Sovereign wealth funds (swfs) are essentially the financial teeth of foreign governments, created to invest national foreign exchange reserves—reserves that are composed largely of U.S. dollars.
A quick look at the owners of the largest swfs reveals a list that includes countries conspicuously undemocratic at best, dictatorial at worst. Yet these are the very nations America is indebted to, and these are the very nations that are now spending their U.S. dollar holdings to buy up U.S. income-producing assets, technology and infrastructure. The United Arab Emirates, China, Russia, Singapore, Kuwait and Saudi Arabia top the list for a combined $2.75 trillion worth of investment funds. The only democratic exception to the list is Norway, with $350 billion worth of oil money under management.
“The amount in swfs continues to grow at an astonishing rate as the giant U.S. deficit of $700 billions [sic] continues to feed their coffers,” notes Nadeem Walayat, writing for the Market Oracle. By 2011, the value of swfs is projected to balloon to nearly $8 trillion.
Take another look at the above list. These are the countries to which the United States (and other Western nations such as Britain, Canada and Australia) is transferring ownership of many of its most strategic and technologically advanced companies. Is that rational?
“As petro and trade dollars flow into these swfs, we will find increasingly larger and larger slices of important U.S. and Western world capital-producing infrastructure flowing into the hands of Asian and the Middle Eastern government-controlled funds as part of a multi-pronged strategy. The effect of which is literally to gradually transfer sovereignty of the United Sates to these countries,” warns Walayat.
Most of America, however, remains oblivious to the national sellout occurring before its eyes.
Amid a developing banking crisis, American banks are wholeheartedly welcoming the influx of foreign dollars as a stabilizing force in the marketplace. Citigroup, America’s number-one bank, Merrill Lynch, America’s largest brokerage house, and Morgan Stanley have all sold off multi-billion-dollar chunks to foreign governments over the past couple of months. But the list of U.S. assets getting snapped up by foreign governments goes far beyond just America’s financial giants: It includes private equity firms, military suppliers and U.S. infrastructure, among others.
Incredibly, many in America hail the recent influx of swfs as financial knights in shining armor. Even President George W. Bush recently stated that he is “fine” with foreign money coming to Wall Street from overseas. He says it would be a bigger problem if the U.S. tried to prohibit the influx.
President Bush is probably right in the short term. At a time when many U.S. banks could be on the threshold of collapse, foreign money has been a huge stabilizer. Without that money, some of America’s biggest banks could have already collapsed.
However, short-term gains—such as they are—can have terrifying long-term consequences. There is no way that the recent influx of foreign money into the banking sector is a sign of U.S. economic strength. The fact that U.S. banks are in a crisis in the first place—and that they had to turn to foreign governments for money—clearly demonstrates how sick America’s financial system is.
Over the long term, the continual divestiture of America’s income-producing assets will—as with the Ottoman Empire—erode America’s economic base. When that goes, the military will follow, and eventually so will America’s sovereignty.
It’s just like Monopoly: He who holds the most and best property eventually wins.
At one time, America held all the properties. It was the richest nation in the world. But Americans wanted to live beyond even those means; they continually spent more on luxuries than the income generated from their many assets.
Then America, rather than reduce its standard of living, decided to sell off some of its holdings.
At first, it didn’t much matter. Hardly anyone noticed that Baltic and Mediterranean were gone. And no one cared when the utilities were later sold to pay the bills.
But over time, as each additional income-producing asset was put on the market, it became progressively harder to maintain the national standard of living. Today, the property auction is intensifying, and soon few valuable properties will remain. Yet America remains oblivious to the fact that if trends continue, inevitable bankruptcy is just a few rolls of the dice away.
The wealth that America once had is quickly disappearing. Even its biggest Boardwalk and Park Place banks are on the block. The nation is being reduced to begging for money from foreign governments.
The structural imbalances within the economy have become huge—so huge that any remedy would be certain to be costly. If nothing is done, says Ferguson, all that remains to be seen is how “quickly today’s financial shift will be followed by a comparable geopolitical shift in favor of the new export and energy empires .… Suffice to say that the historical analogy does not bode well for America .…”
And America long ago spent its last “get out of jail free” card. ▪