Dubai World Ports #2

Here are some economic points by Nouriel Roubini that expand upon my recent post about the Dubai World Ports matter. Emphasis added.

The current political saga and debate about the purchase by a Dubai-based company of the management of six US ports misses the most crucial point: with a US current account deficit running towards $900b this year and probably above one trillion $ next year, in a matter of a few years foreigners may end up owning most of the U.S. capital stocks: ports, factories, corporations, land, real estate and even our national parks. This is basic accounting: if you run a current account deficit (import more than export, spend more than your income, save less than you invest) you need to borrow from the rest of the world to finance such excess of spending (on private and public consumption and investment) over your national income....

Also, the worry about unfriendly regimes is somehow misplaced as, unfortunately, the countries that are now financing the US current account deficit are not our friends and allies but, potentially, our geopolitical rivals or unfriendly states. In the 1980s, the biggest financer of US twin deficit deficits were the U.S. geo-strategic allies: Japan and Europe. Today instead, the biggest financers of the U.S. twin deficits are China, Russia and Saudi Arabia. China is potentially the most significant strategic rival of the US or, at least, a strategic competitor; Russia is a relatively unstable country that is not a US ally and is becoming increasingly authoritarian; while Saudi Arabia is an authoritarian and unstable regime that has been using a small part of its accumulation of petrodollars to finance Islamic fundamentalism around the world. So, for its own financing the US is effectively captive to the political decisions of potentially unfriendly states, an indeed worrisome "balance of financial terror". The war on terror and the war in Iraq are being financed by China, Russia, Saudi Arabia and a bunch of other unfriendly or unstable countries (Nigeria, Venezuela, Iraq, etc.). And all these countries and their private and public investors, whether friendly or unfriendly, now increasingly want to buy US equities rather than useless bonds....

they will sell us their goods and services and they will require to be paid not in IOUs but rather real assets and the gems of the US capital stock. It is only a fair trade. And if we do not like that as a nation, maybe we should start taxing the rich, cut our budget deficit and have more public savings as we did in the 1990s; we should consume less, save more and build less homes that are increasingly bubbly. The alternative is clear: if we continue with our current patterns of spending above our incomes, by 2013 the US foreign liabilities could be as high as 75% of GDP and an increasing fraction of such liabilities will be in the form of equity, i.e. foreigners owning our capital, real estate, assets, ports, parks and whatever other national gems we own. It is simply a matter of basic national income accounting: if you spend more than your income, the willingness of your creditors to lend you money will eventually shrink and you will be instead forced to sell them your real assets rather than IOUs and debts on which you may eventually would want to default on. Any smart creditor know he/she needs collateral against its credit claims; and there is no better collateral than taking over directly the assets of the reckless debtor. Caveat Emptor!