Our future as a financial colony
Foreign governments will be seeking high-return assets for their enormous portfolios without selling dollar-denominated wealth. Consequently, they will have to focus on U.S. corporate securities. With such large-scale investment comes ownership a
byBrad DeLong
Let's look beyond the current financial crisis for a moment. Let's think not about the long run, but the foreseeable medium run in which we are, for the most part, still alive.
For the foreseeable future, China alone will, on net, be buying more than $300 billion a year in dollar-denominated assets. But that is just the tip of the foreign-exchange iceberg.
Governments worldwide now hold more than $5 trillion of dollar-denominated assets as their foreign-exchange reserves. The big fear used to be that they—or a substantial fraction of them—would try to dump their dollar-denominated foreign-exchange reserves, causing a collapse of the dollar, the bankruptcy of Wall Street, and a major depression. We have already experienced the bankruptcy of Wall Street without the collapse of the dollar (or, so far, a major depression). Foreign governments now have a greater incentive to prevent a collapse of the dollar than does the government of the United States. As Nixon's treasury secretary, John Connolly, told the world in a previous era, "The dollar is our currency, but it is your problem." Although the dollar will surely lose value in the future, it is unlikely to collapse, so the value of foreign governments' foreign-exchange reserves will continue to grow.
After this financial crisis and recession are over, what will these governments do with all their foreign-exchange reserves? Interest rates on U.S. Treasurys are likely to stay quite low—a percentage point or so above inflation—for a long time to come. Returns on stock investments, by contrast, are likely to be as high as in the glory days of the 1980s and 1990s. The long-run stock-market-return regressions of John Campbell and Robert Shiller predict stock-market returns of 10 percent per year plus inflation, or more. If foreign governments leave their enormous reserves in U.S. Treasurys and similarly safe assets, they will be presenting the U.S. taxpayer with an enormous financial gift: extremely cheap financing for the U.S. government as it borrows, while the high-return investments in U.S. corporate securities are left to fatten the portfolios of American investors. Because governments, like people, do not like leaving a fortune on the table, they are unlikely to follow this course.
The next generation, therefore, will see a very interesting dance. Call it reverse finance colonialism? Call it something. Foreign governments will be seeking high-return assets for their enormous portfolios without selling dollar-denominated wealth. Consequently, they will have to focus on U.S. corporate securities. With such large-scale investment comes ownership and with ownership comes control. No government will want to play the role of passive investor, with the attendant risk that its partners will tunnel the wealth out from under its grasp, leaving an empty corporate shell.
So what is likely to come to pass is not the socialism feared by the Right—at least not ownership of the means of production by the U.S. government. Instead, it will be ownership of U.S. companies by foreign governments—and on a scale we've never before seen.
Can anything stop this progression? Yes. A collapse of world economic growth—which would create a very dangerous and angry world. Or a sudden return to thrift on the part of American consumers—so that we can finance the industrialization of the rest of the world rather than having them finance our consumption. But neither is likely.
That will leave Americans confronting a new and unprecedented phase of globalization. Government agencies in Beijing, Dubai, and Brazilia will have a large financial interest in everything from the health-care policies of American factories to the compensation packages of corporate executives and the apportionment of seats on corporate boards. And their interest will matter: They will, after all, be the people who have the money—just as Americans were the people who had the money in the years after World War II.
It's not that proxy contests will be initiated in Mandarin (although youngsters in Britain and America may well find themselves being sent to finishing schools in Maharashtra to purge themselves of their hillbilly Oxford or Boston accents and acquire the high-class English tones of Mumbai). But corporate bankruptcy will become a branch—probably the major branch—of international intrigue as governments find themselves dealt in whether they like it or not. And for the rest of us, "working for the man" will take on a brand-new—and foreign—dimension.
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