December 22, 2007

FT is reporting that the Saudis are planning their own sovereign wealth fund that will “dwarf” Abu Dhabi’s $900 billion fund. They don’t give a number, but the verb “dwarf” suggests we’re talking multiple trillions of $.

All those years of living beyond our means, of running trade deficits in the hundreds of billions per quarter may finally be coming home to roost.

Look at these dollar values for the assets of sovereign wealth funds, courtesy of the WSJ:


That’s $2.1 to $2.8 trillion, before including the Saudi fund. In a report published back in October, Merrill projected that SWF assets would increase to nearly $8 trillion by 2011. With another 2 or 3 trillion from the Saudi’s we’re well on our way. And clearly the SWFs don’t control the majority of reserves held abroad. There’s trillions more parked in various government paper just sitting in foreign government bank accounts.

The money being invested to bail out investment bank balance sheets–$5 billion from China going to Morgan Stanley, $10 billion from Singapore for UBS, $7.5 billion from Abu Dhabi for Citigroup, and undisclosed billions also from Singapore to be invested in Merrill–is chump change for these SWFs. And of course their coffers are growing every day that we continue to run a current account deficit.

A substantial portion of these SWF assets, indeed most of the reserves held by the governments behind the SWFs, are likely denominated in dollars. Each of those dollars is a claim on American property. A claim that we have to respect if our property laws mean anything at all.

Back in March 2007, the Treasury Dept. claimed in a report that foreign ownership of U.S. assets (stocks, treasury bonds, corporate bonds etc.) was $7.8 trillion as of June 30, 2006, up from $6.9 trillion the year before. Not all of that is held by governments of course. But clearly foreigners’ claims on America’s productive resources are huge and growing quickly.

For years the Fed has been increasing the money supply as measured by M3 at a rate that far exceeds inflation. I imagine one reason inflation has stayed low is that so many of these dollars are simply going abroad; they aren’t competing for goods here at home. But there’s no free lunch of course, and dollars have to come back.

This is a theme that I plan to follow on this blog. Something I call The Great Reversal. Once upon a time, in the late 19th century and before WWII, the U.S. was a great industrial nation whose economic growth was largely driven by production rather than consumption. But in an age of a strong dollar and expanding free trade, production has moved to places where it could be done more cheaply. China for instance. Of course America is still a great industrial power, but less so as a % of our overall economy than once upon a time.

Consumption and free trade have led to our dollars going abroad. The Great Reversal is now in process. As new industrial powers like China see their standard of living and the value of their currencies increase, their economic growth will increasingly be driven by consumption. They’re going to spend the dollars they’ve saved…..to buy large stakes in great American companies, for instance.

I call it The Great Reversal because the the flow of dollars is going to reverse. Americans will be spending less of their savings on foreign-made goods, while foreigners will be spending more of theirs on American-made ones. This is the great economic challenge–and the great economic opportunity–of our times.

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Centro is just way too big to go down, there are still too many players on the sideline with cash at the ready who are itching to jump into that deal. Now that they got thier extension and themarket didnt completely melt down, I’m sure more suitors will present themselves. I just found your site for the first time…great site by the way! I added you to my Digg bookmarks!

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