In his half-page piece, McTeer gave a learned, yet comprehensible tutorial on various factors affecting exchange rates. He differentiated capital flows from trade flows, explaining why sometimes the former offset effects one would expect from the latter.
Near the end of his editorial, McTeer wrote,
"The accumulation of massive dollar reserves in China led to worry that they would diversify those holdings at some point, a diversification that would involve moving the dollar into other currencies, especially the euro -- with such a sell-off depressing the dollar and leading to higher U.S. interest rates. Instead, the diversification so far has been from Treasury securities into private-sector dollar assets. To continue the current account deficit is to continue the fire sale of U.S. assets to foreigners.
They want to get into U.S. assets when the dollar is cheap and get out when the dollar is dear. The more the dollar depreciates, the sooner it will be expected to reverse, and the sooner foreign investors will resume their participation in the most dynamic, creative economy in the world."
The term 'fire sale' caught my eye. McTeer, like so many other learned, experienced businessmen or economists, wail about the sale of US economic assets to foreigners at distressed prices, due to the dollar's current value, relative to other currencies a year or so ago.
I would like to argue the proposition that the assets being bought 'on sale' are, for the most part, assets that are no longer as valuable as they once were, and probably not the most dynamic, attractive part of our economy.
For example, the 'fire sale' of US banking assets- Citigroup, Merrill Lynch, and Bear Stearns- is often used to prove the point that we are selling ourselves to foreign countries, companies or individuals.
However, Goldman Sachs, Lehman, Wachovia, and many private equity groups and hedge funds have not sold interest in themselves to foreigners.
Furthermore, how hard would it be for the healthier private firms to compete with the publicly-held, weakened banks and brokerages? This is a business which, we are reminded, has its most important assets walking out of the doors every night.
What is so special about an ailing Citigroup or Merrill Lynch that can't be duplicated, or improved upon, by fresh capital behind better managers in new companies doing the same things.
By contrast, nobody seems to be buying our economy's more successful and innovative firms, such as Google, H-P, FreeportMcMoran, bio-pharmas or manufacturers.
Could it be that Schumpeterian dynamics is at work here? The weak firms are being bought by foreign acquirers, while the stronger firms remain above the fray.
Then there is the issue of dynamism. To wring one's hands over our economy being 'bought' by foreigners is to ignore our pace of innovation and value creation.
Firms like Google weren't anywhere near as strong and dominant even five years ago as they are now. Five years from now, new companies we've yet to completely understand will be joining them as dominating forces in their business sectors.
It seems to me that, for example, the financial services firms which are the target of overseas investment are engaged in mostly commodity businesses. And poorly managed at that. What's the fuss about?
Are we worried that foreigners will do a large amount of US unsecured consumer lending? Or corporate lending? These businesses are easily started by competitors, if that is a problem.
Are we worried about foreigners' access to the US financial system? They already have it. And they already must submit to US regulatory scrutiny. It's unlikely that we will suffer because Citigroup sells more diluted equity to some Arab interests.
Are we so sure that the companies being 'lost' to foreigners are where we have sustainable competitive advantages which will result in long term, consistently superior total returns?
Personally, I think we are not so sure.
Mr. McTeer's excellent article opened my eyes to a key point that has, I believe, been overlooked in the current panic over the dollar's value, foreign investment, often via 'sovereign funds,' and US economic innovation.
Even with a currently weaker-than-recently US dollar, our vital engines of economic growth and competitive advantage seem to be firmly in US hands, while lesser companies fall to investment by foreign interests.
No comments:
Post a Comment