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Crossroads

By

Can I buy just a little more time?

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On the Buzz & Banter, Kevin Depew described the initial U.S. reaction to a Chinese company's bid for a U.S. energy company as negative, protectionist, and nationalist. (The House this morning voted to block the U.S. Treasury from approving the CNOOC bid for Unocal (UCL). It has yet to be debated in the Senate.)

I remember being on Todd's porch overlooking midtown and reacting to a thought, the thought that there was not necessarily a way out for the U.S. from the incredible imbalances our economic policies had created, but at least a way for them to continue.

If the U.S. were to allow foreign companies and investors, which in this case would really be the governments of China and Japan (the Chinese government, incidentally, is the largest shareholder in CNOOC), to buy equity in the U.S. in vast amounts, those imbalances could continue to be financed for some time.

Foreign lenders would only offer so much of their capital inflows through bonds; as the yield curve flattens to a new record in this cycle (the 2yr-10yr spread is now down to only 26 basis points), we can see that this is true. If this dried up, U.S. interest rates would rise dramatically as foreign capital dried up. But just like Japan did in the 1980's, we could have a much more serious round of foreign inflows if those flows went into companies and real-estate. I am not talking about Europeans buying some Long Island property, for that is the tip of the iceberg. Since most of the foreign investment is being done through central banks, somehow these flows must make their way into the U.S. in vast amounts. But how can a central bank buy a company or real estate and would the U.S. let it in such vast amounts necessarily?

Well, China (and probably Japan) could engineer this process since their central banks are such an integral (even more so than the Fed in the U.S.) part of their economies, so integral in fact that I don't know that there is a difference. Is there a difference between CNOOC and the government of China? I don't think there is much.

So if the U.S. allowed vast amounts of capital to flow into equity (ownership of assets) by what are essentially foreign governments, this could alleviate the pressure of waning foreign capital flows and continue to finance our record current account imbalances. Of course, this is not a solution: the current account deficit is still 6.4% of GDP and growing. But it buys more time - time at a cost.

Equity, or control, in assets is much different from lending. Lending does not become ownership until there is foreclosure, and foreclosure is impossible in the lending done by foreign central banks because the U.S. can print dollars to pay back that debt. So lending would never result in direct control of U.S. assets like companies and real estate.

So the question is, does the U.S. Congress become protectionist and disallow the direct ownership (control) of U.S. assets by foreign governments (private companies controlled by foreign governments)? We may be getting our first indication of an answer.

If the answer, ultimately, is no, than globalization will come full circle and tremendous imbalances will be soothed for a time, but at a cost: you and I may be in essence working for the Chinese government.

If the answer is yes, protectionism will reign. Protectionism (tariffs) was a primary cause of deepening the depression in the 1930's.

No positions in stocks mentioned.

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