Fair Harvard...
Demand for American Treasury Securities

Ka Ching! Ka Ching! Ka Ching!

Brad Setser writes:

Roubini Global Economics (RGE) Monitor : The 2006 US current account deficit looks to be a bit under $1 trillion.... So it is not at all unreasonable to say that financing the US current account deficit requires that the US raise $20 billion a week, whether by selling debt, selling stocks or selling off real US assets. 52 * $20b = $1040. That is equal to selling one Unocal a week to China (CNOOC was willing to pay $20 billion). Or selling three companies the size of P&O to the Emirates a week.

P&O is a bad example though. It is British company, so its sale finances the UK's current account deficit, not the United States' deficit. And most of the value of the $6.8 billion deal doesn't come from the P&O's American assets. But the broader point still stands. If the US was financing its current account deficit with equity not debt, the Committee on Foreign Investment in the US (CFIUS) - the group that approved the port deal - would be very, very busy. Moreover, if foreigners who already hold dollar-denominated bonds ever decided they wanted to shift into equities, the potential sale of physical US assets would be even larger.

So far the US has financed its deficits with debt - and debt doesn't carry with it the right of control. Though countries that are hooked on debt do sometimes find that their creditors have a bit of influence over their policies. But fundamentally, there is no way the US can sustain $1 trillion deficits - the 2006 deficit is not going away in 2007 or 2008 barring a catastrophe, at best, the deficit won't keep getting bigger - without selling off large pieces of itself to the rest of the world.

Wysocki, Phillips and Schroeder got this -- and much more -- right in their page 1 Wall Street Journal article. My only real quibble with their article: by relying on the US TIC data, they vastly understate the capability of the oil sheiks to acquire US assets. The TIC data shows total Middle Eastern oil exporters hold $121 billion in US securities. That almost certainly understates their dollar holdings....

One thing is pretty clear: the US isn't ready to accept the consequences of sustained $1 trillion deficit. Even if the current account deficit stops rising in nominal terms and starts to fall in real terms, $1 trillion annual deficits imply that the US will sell $10 trillion of US financial assets to foreigners over the next ten years. And unless something changes, the foreigners with cash to spare will in the Middle East and East Asia.

$10 trillion can buy a lot of ports, oil companies, computer companies, consumer brands - you name it. But only if the US allows it. My personal guess is that the US won't. We in the US are willing to sell tons of IOUs to the world, but not tons of US companies. At the same time, there is no evidence the US is ready to take the policy steps needed to reduce its need for financing from China and the world's oil exporters...