making nice to foreigners

An article in the Washington Post makes a point that should be obvious, but wasn't to me. The falling value of the US dollar makes life easier for companies that have goods to sell foreigners (Harley Davidson Motor Cycles, I hope). It also makes more expensive the million things Americans buy from abroad. And it helps US tourism; visiting here becomes the thing for foreigners to do. Just as predictably it encourages European and other overseas buyers to pick up pieces of us -- our real estate, our companies; farms, factories, and franchises. Here's the citation: What Can They Buy? A Good Bit of Us., by Moisés Naím (Washington Post, Sunday, April 27, 2008; Page B04). The author says,

U.S. companies have rarely been so cheap. Five years ago, a German or Spanish company that coveted a U.S. competitor worth $500 million needed almost 550 million euros to purchase it. Today, it would take just 319 million euros. The U.S. marketplace will be altered by an infusion of new foreign competitors that will manufacture their own products in the United States. These firms will use their new American base both to export to the world -- including their own European markets -- and to serve the U.S. market from inside its borders.

Such a transatlantic shift will inevitably, ignite a political firestorm on both sides of the Atlantic. [But] it will be impossible for U.S. politicians to stop the Euroinvasion, and European politicians will prove equally helpless in preventing their companies from moving to the United States. While blocking a few large investments by foreign government-owned funds in U.S. ports, defense industries and oil companies may be possible, preventing thousands of private companies from investing in the United States is not. Although difficult economic times always create political opportunities for demagogues and populists, the United States is far from ready to repeal capitalism. And stopping the Euroinvasion will require nothing short of that.

An article from Agence France Presse adds a bit of spice to this thought. Although much of the foreign investment in the US is coming from individuals and private corporations, much is also coming from large financial concerns, among them the huge sovereign wealth funds that governments have set up to manage their budget surpluses. The article says these surpluses are large and growing. Here's the head and lede:
Sovereign wealth funds hit 3.5 trillion dlrs in 2007: US firm.

Sovereign wealth funds have mushroomed 24 percent annually over the past three years to hold a total of 3.5 trillion dollars in 2007, a US economic firm said Monday.

Global Insight said that projected on that annual growth pace, sovereign wealth funds (SWFs) would surpass the entire current economic output of the United States by 2015, and the European Union by 2016.

As always, there's concern that these government-run funds will be used for political not just economic purposes. Of course the unbelievably large US deficit makes this country vulnerable to blackmail by other governments simply because we rely so greatly on them to help cover our debt through purchase of US Treasuries and the like. The potentially inimical actions of sovereign wealth funds adds spice to the paranoiac mix. It's not just the uncomfortable feeling one gets on realizing that -- more and more -- foreigners "own" us; it's also the risk that they'll let it be known that they will do some destabilizing action, like a sudden shift in investment that puts thousands of Americans out of work, unless the US government takes a position that agrees with theirs (reduces or eliminates US subsidies for farm products for example).

Along with these two somewhat scary stories comes one of a type that's becoming increasingly familiar. The price of the energy we use is likely to continue to rise. As Al Jolson said "You ain't seen nutt'n yet." From the Financial Times: Opec says oil could hit $200, by Carola Hoyos in London. The article says that oil continues to cost more partly because the US dollar is worth less and less. But, as we all know, the price is also manipulated by suppliers. There's no free market for oil. The wonderful discipline of oil producing nations enables them to screw the rest of the world if they wish, and apparently they do. There's nothing new about this state of affairs. For a long time we've been living in paranoia over the havoc that OPEC could wreak in the US economy. In fact our carefully maintained good relations with Saudi Arabia might be something of a bellwether for our life a world of cheap dollars where foreigners buy up America. I mean to say the huge diplomatic, commercial, and political efforts to stay on the good side of the Saudi ruling family may be a useful learning experience as we find ourselves required to make nice to many others who could do us harm.

Addendum:The Washington Post has an excellent article on the global escalation of food prices: The New Economics of Hunger, A brutal convergence of events has hit an unprepared global market, and grain prices are sky high. The world's poor suffer most. For the 1 billion people living on less than a dollar a day, the world's worst food crisis in a generation is a matter of survival. By Anthony Faiola, Washington Post Staff Writer, Sunday, April 27, 2008; Page A01

The article makes it plain that nations are interdependent and there's no policy that is purely domestic. We no long live in a world where any nation can act unilaterally to protect its citizens. For example, a country that fears the consequences of rising grain prices may wish to stockpile grain, but this stockpiling makes prices rise higher and faster and consequences are bad for all. Similarly, fears of dwindling supplies may cause grain producing nations to control exports. That action reduces world supply of course, driving prices higher, even within the nation that's trying to control exports. (And resorting to price controls to prevent price rises can destabilize the country's financial markets with further unfortunate consequences.)

It's another indication, for me, that the US habit of acting unilaterally has had its day. We're still the dominant world power, but our ability to influence affairs with selfish arrogance is growing weaker and weaker.

economics 101

I keep a blog called Science and Reason in my aggregator. It's by Charles Daney, a science writer. That's something I wanted to be when I was high school age. He writes about cosmology, genetics, mathematics, and -- this week -- he's got an interesting post on economics: Economics 101, Science and Reason. It's not about free markets, free enterprise, and freedom of trade -- which are pretty empty terms after all -- but about manipulations that aim to create maximimum financial return. A kind of Machiavelli for markets.

It's short. Go there and read it.

One point he makes connects with my recent research. He says people who want to sell stuff often turn to governments to gain protection from competition, obtain subsidies to help them invade new markets, and the like.

I see this prefigured in the operation of medieval cartels and monopolies. Back then both church and state enacted strict laws prohibiting unfair trading practices, and then both church and state gave themselves dispensation to set up their own cartels and monopolies. The papal monopoly in alum is a good example. Alum was used in dying fabric and tanning hides and alum ore wasn't common. When discovered in papal territories, the papal curiat set up a monopoly to exploit the find, excusing itself from its own fair-trade rules by earmarking profits to a war-chest for fighting infidels. It leagued with bankers, merchants, and mining specialists to insure maximum returns -- the most important alliance being with the powerful Medici clan of Florence. Together the papacy and the Medici systematically eliminated competition. The used military force to suppress production in competing mines within Italy. They prohibited importation from sources outside Italy (Turkey being the only significant one) by threats of ecclesiastical censure. They made exclusive deals for distribution of their product within Europe obtaining guaranteed sales from the distributors and promises of non-competition. Having done all this they reaped the rewards of their labors. And, when alum ore was discovered in England, their superior discipline and the efficiency of their organization became apparent as the Stuart Court bumbled its attempt to set up a competing monopoly of its own.

{Making alum from alum ore. source: De Re Metallica, by Georg Agricola, 1541}

Robert B. Ekelund provides a concise description of these events.