The Politics of Equity Capital Inflows

If a country runs a current-account deficit, that means that it's going to run an equal and opposite capital-account surplus: it's simple economic mathematics. And when the federal budget deficit is a bit over 1% of GDP while the current-account deficit is somewhere north of 6% of GDP, clearly there's going to be much more to that capital inflow than the simple purchase of Treasury bonds by foreign sovereigns.

The NYT has a good piece up on one of the inevitable consequences: now that foreigners are pretty sated in terms of debt securities, they're increasingly buying equity in US companies instead:

Last year, foreign investors poured a record $414 billion into securing stakes in American companies, factories and other properties through private deals and purchases of publicly traded stock, according to Thomson Financial, a research firm. That was up 90 percent from the previous year and more than double the average for the last decade.

I suspect that many of the people who have propelled this story to the top of the NYT's most-emailed list are Americans worried about foreigners "taking over". Have a look at the lede of the front-page story in the NY Daily News on January 16, after US banks announced another tranche of capital injections:

America is for sale - and the buyers of some of our most iconic corporate assets are a passel of Mideast oil sheiks, Asian government investment funds and market Marxists.

This kind of knee-jerk xenophobia is, of course, rare among the cosmopolitan elite and the kind of people who are likely to support Mitt Romney or Barack Obama for president. But if it can be found in such unadulterated form in a front-page story of a not-particularly-virulent New York City newspaper, you can be sure that it's pretty widely felt nationwide, perhaps among Huckabee or Edwards supporters.

I'm in Europe now, and to me this news is utterly unsurprising: I see it as a rather obvious money arbitrage, the corporate-finance equivalent of the hordes of British and Spanish tourists who descended on New York to do their Christmas shopping at the end of last year.

And it's great for the US economy: a $3.7 billion investment in an Alabama steel plant, for instance, has a huge effect in terms of local-economy stimulation, and that $414 billion is more than three times the size of the fiscal stimulus mooted by George Bush.

Astonishingly, however, it's a steelworker union official who seems most upset about all this new money and the new jobs which come with it.

"It's the culmination of a series of fool's errands," said Leo W. Gerard, international president of the United Steelworkers. "We've hollowed out our industrial base and run up this massive trade deficit, and now the countries that have built the deficits are coming back to buy up our assets. It's like spitting in your face."

I suppose it is a bit like spitting in your face, if instead of saliva the spit was made up of billions of dollar bills.