Foreign Investors Turn Away From U.S

0 Comments | Insight on the News, June 24, 2003

Byline: Jamie Dettmer, INSIGHT

Foreign Investors Turn Away From U.S.

The United States still can rely on foreign investors to hold dollars

can't it? Apparently not necessarily. With U.S. interest rates lower than those in Europe, and the dollar's 20 percent drop against the euro in the last year reducing the dollar-denominated value of U.S. assets, investment from stable areas outside the nation has fallen.

Last month, Berkshire Hathaway Chief Executive Officer (CEO) Warren Buffett warned that the record deficit is unsustainable. "We are in a country that is buying more from the rest of the world than we're selling, and we're doing it on a big scale," he told corporate CEOs. "We have such a strong currency historically that there's been a delayed effect. But it's started to happen in the last year and, unless the underlying conditions change, it's going to continue."

Buffett's warning has been echoed by Kenneth Rogoff, the International Monetary Fund's (IMF's) managing director, who said recently: "Suppose for a minute we were talking about a developing country that had gaping current-account deficits year after year, that had had budget ink spinning from black into red ... open-ended security costs and a real exchange rate that had been inflated by capital flows. It's fair to say [the IMF] would be pretty concerned."

According to the Commerce Department, private net purchases of U.S. government securities fell by $62 billion to $338 billion in 2002. Net purchases of U.S. corporate and other bonds fell by $41 billion to $161 billion, while net purchases of stocks fell by $63 billion to $56 billion. Bush officials insist that this picture will change as U.S. exports soar because of a less-expensive dollar. They believe also that imports will decline as U.S. consumers buy fewer foreign-made goods, made relatively more expensive by the changed currency ratio.

Some experts agree the bleak picture will alter rapidly, maintaining that as Europe appears to be heading back into recession, foreign investors will have no alternative but to look to the United States as a safe haven. "Are investors going to move huge amounts of capital out of the U.S. and put it in Japan or Europe? They would be mad to do that," said Lyle Gramley, a former Federal Reserve governor.

Economists Question Fiscal Projections

Bush officials maintain that record deficits likely to top $300 billion in fiscal 2004 and 2005 don't really matter. They say deficit funding and tax cuts will spur the economy, trigger a pickup on the stock markets and result in swelling state and federal coffers. As a downturn changes into boom the United States will see a return to the fiscal plenty of the 1990s. It is all good Keynesian logic pump priming as Franklin D. Roosevelt called it although Bush aides prefer not to describe it that way.

But there are academic economists who harbor doubts. They include Jagadeesh Gokhale and Kent Smetters, who at the request of the Treasury Department undertook a study meant to be an annex to the proposed 2004 federal budget. In the end their conclusions weren't helpful for the administration's case and the study was dropped.

According to the two academics the current budget measurements and future projections underestimate seriously the financial burden piling up for future generations as retirees account for a greater share of the population. The study claims that what the government is committed to spend during the coming generations means that U.S. public debt soon could be 10 times greater than the existing public debt, and four times the current gross domestic product by the end of the decade.

Fourth-fifths of the debt will be due to Medicare, and there will be a huge drain from Social Security obligations. While Federal Reserve Chairman Alan Greenspan hasn't been so alarmist, his voice, too, quietly has been added to a chorus skeptical of the advisability of further tax cuts.

Pot Protests That The Kettle Is Black

Back on executive pay. In the last issue, the business recorded the revolt by British shareholders in the pharmaceuticals firm GlaxoSmith Kline. In May, they voted down a compensation package for their chief executive that could have seen him walk away with up to $33 million if sacked from the company. The vote has spurred shareholder rebellions at other U.K. firms, including ICI.

An outgoing chief executive, Vodafone's Sir Christopher Gent, surprised the city of London by rushing to support the move by the GlaxoSmithKline shareholders, arguing the deal the shareholders voted down was excessive. The surprise came as Sir Christopher himself has come in for a lot of criticism over his annual compensation $18 million.

But while ready to find fault with the GlaxoSmithKline compensation, he sees nothing wrong with how much he gets, accusing critics of being motivated by "envy, not aspiration." Indeed. "There is some idea in Britain that behind every great fortune there is a great crime. There is not the thought that it is possible to do well by genuine risk-taking and hard work," he argued.