When you’re talking about the American economy:
We like to talk about the global economy, and the easy movement of capital back and forth across borders. But, it isn’t really true as a practical matter, however theoretically true it might be. To move that money back and forth, there has to be something to invest in at the money’s destination. And for the most part, the one place in the world where there’s lots of stuff to invest in is the US.
Sure, there are a lot of other markets, and, maybe you could dole all that money out in penny packets all across the world. But then, you now have to worry about the currency risk of 100 different currencies, rather than one. And it becomes a lot harder to maintain liquidity by doling out your holdings so widely. And, of course, your transaction and accounting costs spiral, and your currency exchange risks multiply. There’s simply a built-in inertia to repatriating US assets, because your options—and risks—for investment after repatriation become a lot more complex.
Second, there are some big players, especially China, that simply can’t repatriate their US-denominated investments without endangering their own economies, either because their economies are export led, or because their own currencies are…uh…less than reliably convertible in the FOREX. If China dumps its US currency holdings, the price of the renmimbi will skyrocket as the dollar collapses in the FOREX. Now, Chinese exports will cost an arm and a leg, which means China will get substantially fewer export orders. Now, there’s no doubt all sorts of domestic capital projects the Chinese could make with the renminbi they repatriate, but, China is an extremely poor country on a per-capita basis. It’s not like they have a huge domestic market that just straining at the bit to buy stuff. So, where’s the ROI in killing the export market for an export-led economy? I mean, I guess the Chinese could use the money to try and build a consumer economy, but I doubt that even with the size of their dollar holdings, there’s enough money to actually do that in a country of 1.3 billion dirt-poor farmers and factory workers.
That bit about what you do with your money when it gets there, and the bit about China? I’ve tried a million times to explain this to people using my hayseed economic vocabulary and they look like they want to slug me. I get all this stuff, and understand it organically. Like some kind of dork savant, I read Dale’s economic stuff, and I go “Yeah. Uh huh. Duh.” to myself, but I simply can’t make it clear to others.
Oh, well…go read it. Comment there. I can’t argue with you about this stuff. If you don’t believe Dale’s right about the (and I don’tlike to use this adjective, but it’s what comes to mind immediately) impervious nature of the American economy, then it’s only going to bite you in the ass, not me. I like my hand, and I like my stack, and I like my position, and I’m going to play this hand. The great thing about America, though, is that it’s easy to fold a crap hand, because they’re always dealing a new orbit, even (and really, especially) while you’re in the middle of one.
OK, I hear ya…enough with the horrid poker analogies…
