Memorial Day weekend is of course a time when many Americans think of freedom and independence, and the price their countrymen and women have paid throughout history to preserve them. By chance (or fate?), the other day I came across an item on-line containing a reminder that standard notions of these objectives still tend to overlook a vital dimension – the economic.
The item in question was a post last year from The Economist magazine lamenting the enthusiasm with which most western governments subsidize borrowing throughout their economies via tax breaks. Leading examples, of course, include the deductability of mortgage interest and favorable tax treatment for interest payments by corporations.
But however important this subject is – and for a world that’s created record levels of debt lately but not record rates of growth, it’s important – what really jumped out at me from this article was the statement “had China invested its foreign reserves in American shares, it would now own about a fifth of the S&P 500 index and have de facto control of corporate America….”
The Chinese would have captured these commanding economic heights because the United States has run up multi-trillion-dollar trade deficits with the PRC over the last twenty years. This has only been possible because Beijing has been willing to (a) lend Americans the money to live beyond their means; and (b) take “payment” in many instances in the form of U.S. assets (i.e., anything with perceived value) that Americans have been only too happy to sell off.
The Economist contends that China has put most of these investments into U.S. Treasury debt for two main reasons: Official American paper has been seen to be safest financial investment option of all, and the safest political option, too. Surely the American people and their leaders would never permit any foreign government – much less a communist government – to gain such power and potential influence.
But then again – consider that China has been less and less interested in Treasury debt lately, and more and more interested in using its trade profits to buy “hard assets” like real estate and companies (along with creating new assets, including companies). Consider that the economic conventional wisdom seems absolutely nothing wrong (except, sometimes, when defense-related firms or technologies are affected) with this Chinese activity, and often loudly sings its praises, pointing in particular to the supposed job-creating effects. Consider that Washington’s major trade initiative recently – the Trans-Pacific Partnership (TPP) agreement signed by President Obama but not yet approved by Congress – is likeliest to boost the U.S. deficit with China yet higher, since it contains a back door for imports with high levels of Chinese content. Consider that the American political and chattering classes’ bipartisan conventional wisdom remains that trade deficits – even huge, chronic imbalances, or shortfalls with emerging geopolitical rivals – are no big deal, and even signs of national economic vigor. And consider that unlike many other national populations, Americans have never had any experience living in an economy that’s substantially controlled by foreign interests.
So it should be easy to see how China could increase its footprint, and therefore influence, in the American economy to genuinely worrisome proportions before Washington woke up to the resulting dangers. Ditto for other foreign powers that have racked up big trade surpluses with the United States.
Don’t take any of this as an argument that all such foreign investment in the United States is bad. In fact, I’ve long argued that, with the right conditions, such capital could be turned into major economic building blocks of a genuinely healthy economy. But inflows that have reached current proportions, welcomed with such wide open arms, can only increase the nation’s exposure and vulnerability to enterprises – often under direct or indirect government control – whose first loyalties and obligations are not to the United States. Can there be any doubt that the lion’s share of those that Americans honor this weekend would have understood this in their guts? And that U.S. leaders need to wake up to these threats ASAP?