Our Problem Is Deficits, Not Foreign Money
The question to the President before he left for Tokyo reflected widespread concern: “How do you reassure those Americans who are afraid of Japanese economic power, who think they are buying and owning too much of the U.S. economy?”
But Bush’s response was less than reassuring. “I’d tell them, don’t get so concerned over foreign ownership that you undermine the securities markets. We have horrendous deficits and foreign capital joins domestic capital in financing those deficits,” the President said. In other words, don’t make waves because we need their money.
It may be the first time a U.S. President offered an image of America as a shuffling mendicant with a nervously outstretched hand. He should have told Americans to worry about the budget deficit, not the foreign financing. Instead, he probably added to their fears.
But what’s the truth of the matter? How much do foreigners own? Could they pull their money out? And what if they did?
Knowledge is the antidote to fear. The figures are not alarming. The gross debt of the U.S. Treasury--commonly called the national debt--is $2.7 trillion, and foreign central banks and private institutions hold $332 billion in U.S. government bonds, bills and notes--12% of the total. Of that, Japanese investors hold $91.3 billion, or 3.4% of the U.S. national debt.
Seek Interest, Safety
But even that overstates Japan’s importance, says economist Alan Shameer of Rinfret Associates, a New York currency trading firm, because it includes $22 billion in Treasury bills held by the Bank of Japan for currency transactions with the Federal Reserve. Japan’s real holdings are $57 billion, or 2% of the national debt.
What if they sold out in a hurry? They’d lose money as panic sales always do. But selling out is not how the real world works anyway. Japanese investors put their retirement savings in U.S. securities for the same reason German, Dutch and Taiwanese investors do: They’re seeking high interest with safety. U.S. bonds pay more than 8%, Japanese government bonds less than 4%.
As to “horrendous” deficits, they arise because the government spends roughly $150 billion a year more than it receives in taxes, and adds to the national debt by selling new bonds and bills. Japanese investors buy roughly $40 billion of each year’s offerings, but they also sell bonds and bills. Net Japanese purchases last year were under $15 billion--hardly buying up America.
What if they didn’t come to the auction? The deficit would attract finance from elsewhere in the U.S. markets. The amount we’re talking about is less than two big leveraged buyouts.
And if Treasury had to boost interest rates to attract financing, could that cause a recession? It could, with consequences for countries that sell to the United States--such as Japan, which depends on U.S. exports for 4.5% of its economy, and a much higher percentage of its employment.
Memories of War
What about foreign ownership of U.S. business? Fact: U.S. holdings of factories and real estate overseas total $309 billion, 18% more than foreign holdings of U.S. business and real estate at $262 billion. And Japanese-owned businesses in the United States trail those of Britain and the Netherlands in size and importance. British Petroleum owns vast amounts of Alaska’s oil, Royal Dutch Shell owns Texas and California oil deposits.
Yet people worry when Japanese speculators buy Los Angeles office buildings. Why? War memories or racism account for some reactions; Americans waking up to an interdependent world economy accounts for more. Other countries have been there for decades. IBM controls a hefty portion of Japan’s computer market and even more of its vital technology.
So what’s the beef on the budget deficit? That to the extent we depend on foreigners, we ask their help to finance Medicare expenditures that their own societies don’t make, or aid to U.S. mortgage markets while home ownership remains a distant dream for their own people.
We pay a price for that--in high interest rates that retard investment and productivity growth in the U.S. economy, thus making our society poorer.
The deficit diminishes U.S. leadership. The government cannot lead a program to revive Latin American markets--once growing U.S. export customers--because it’s strapped for cash.
How did we get into this bind? By overestimating, since the 1960s, how much economic growth we would have, and therefore how much we could afford. So we’re stretched thin. But more than taxes to eliminate the deficit, we need discipline for hard decisions. How much Medicare should we have? How much defense?
Make no mistake, if the deficit were eliminated, foreign investment would still flock to the big, safe U.S. market. But there would be less fear and more self-respect. And the President wouldn’t have to cravenly ask Americans to keep their mouths shut lest they upset foreign investors.
