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Saturday, August 24, 2002
Steven Baum notes a Comstock Funds 'Daily Comment' that outlines the extreme risk the American economy faces from potential falling-off of foreign investment in US equities. If foreigners don’t keep investing in the U.S. as we continue running $400 to $500 billion per year current account deficits the U.S. dollar could be in trouble. For the foreign investor, a strengthening dollar enhances the return from investing in U.S.equities, while a weakening dollar decreases it. The whole process turns into a vicious circle of the foreigners trying to bail out before the dollar and stocks go lower, while their sales of dollar based securities drive the dollar and stocks lower. This is not a pretty picture. The current account deficit must be financed by foreigners redeploying over $1 billion a day of U.S. dollars back into this country. If foreign investment does not continue at the levels of the past few years, this could have a major impact on the U.S. dollar. If that in turn, causes actual net selling of U.S. financial securities the vicious circle of selling would commence. In an earlier post, I estimated the risk of Saudi disinvestment in US assets as low given that, as things stand now, alternative investments would be money-losing propositions. If the trickle of outflows of foreign money turns into a flood, however, all bets (so to speak) are off. Just about anything would be a better investment than US equities. As inept as their policies have been, it's inconceivable that the president's men are unaware of this looming catastrophe. Since they don't have the ability to restore real or even perceived value to our corporations, other options have to be pursued to save our collective bacon. If I were asked my opinion, I'd don my realpolitik cap and tell them to destabilize as much of the world economy as possible. With that in mind, war with Iraq is a dead cinch. I shudder to think what they have in mind to make China look like a bad investment, to say nothing of Europe. 
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