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19th September 2008 Charles J. Brown
02:45 pm

The Decline of American Power, Part 216


Not to go all Paul Kennedy on y’all, but I was struck by the last three paragraphs in a story in the Washington Postdated this morning:

Analysts said one of the biggest impacts of the crisis is to undo the long-held image of the United States as a fail-safe place to invest money. Hundreds of billions of investment dollars have poured into the United States in recent years, much of it from Asian economies where a powerful culture of individual savings contrasts with the earn-and-spend philosophy of the United States.

Many of those Asian investors were feeling burned by the failure of U.S. institutions once promoted as the safest of bets. Though Asian and Middle Eastern sovereign wealth funds lavished rescue money on U.S. lenders earlier this year, those funds appeared to be showing increasing caution.

“The big risk for the United States is that people will begin to feel that we really don’t know what we’re doing and lose complete confidence in the Federal Reserve, the Treasury and the U.S. financial system,” said Edwin M. Truman, senior fellow at the Peterson Institute and a former Treasury assistant secretary. “That hasn’t happened yet, but it is a risk.”

Talk about burying your lede.  The big story isn’t that governments around the world are moving to “stanch panic,” as the Post headlines the story, but rather that other governments — and perhaps more importantly, investors — no longer view the United States as a “fail-safe place to invest money.”

Contrary The Post’s assessment that investors have yet to give up on the U.S., The International Herald-Tribune is reporting that Asian investors may already be losing faith in the United States:

Tremors from Wall Street are rattling Asian confidence, leading many investors to question the wisdom of being invested in the United States to the tune of trillions of dollars.

Asian investors were starting to show hesitation even before the financial earthquake of the last week. Now, a wariness toward the United States is setting in that is unprecedented in recent memory, reaching from central banks to industrial corporations, from hedge funds to the individuals who lined up here to withdraw money from the American International Group on Wednesday.

Asian savings have, in essence, bankrolled American spending for decades, and an Asian loss of confidence in American financial institutions and assets would have dire consequences for the U.S. government and American taxpayers.

Damn straight it would.

But individual Asian investors are not the only ones who have kept the good times rolling in the United States.  As you may or may not know, one of the biggest sources of capital flowing into the United States over the past few are sovereign wealth funds — state-owned investment funds created by governments when they have budgetary surpluses.  Think of them as a government’s rainy day fund, designed to help avoid boom and bust cycles.

Guess where may sovereign wealth funds have been investing?  In the American banking sector, including Morgan Stanley and Merrill Lynch.  As Inspector Clouseau once said in one of the Pink Panther movies, not anymore.

As the American investment banking industry seems to teeter, many investors are asking why the sovereign wealth funds from the Middle East have not stepped up.

Less than a year ago, the funds spent billions of dollars for minority stakes in Wall Street banks. As oil prices peaked near $145 a barrel this year, the Middle East sovereign wealth funds amassed even more cash. Still, even as the values of banks like Goldman Sachs and Morgan Stanley are swooning, Middle East funds are not biting.

The explanation is simple, bankers in the region say. Plenty of other, more attractive assets are out there right now. With markets having been hit by the global downturn, compelling, value-priced deals are numerous — from sports teams in Britain and publicly traded companies in Russia to deals closer to home, like Middle East infrastructure buys, Youssef Nasr, chief executive of HSBC Bank Middle East, said.

When investors decide that their money would be safer in a British soccer team than in an American bank, I think we can take that as a pretty good sign that we’re in serious trouble.

For far too many years, Americans have been able to sustain our lifestyles in large part because Middle Eastern and Asian investors saw it in their best interests to prop up the American economy.  They’ve bankrolled the consumer boom and the real estate bubble, blithely confident that investing in the United States was the safest possible bet.

Right now they’re feeling burned.  The big question is whether that’s a temporary phenomenon or a permanent shift.  If it’s the latter, and you’re wondering what the consequences for the U.S. economy will be, think Lehman Brothers on a national scale.

My country ’tis of thee, sweet land of penury.

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This entry was posted on Friday, September 19th, 2008 at 2:45 pm and is filed under globalization, politics. It is tagged under , , , , , , . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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