Which one's rich?

....................... Who's flying high now?

Let's see how we're doing.

America's reserve assets at April 2007 were $66.72 billion, of which about $11 bn in gold and $42 bn in foreign currency. The USA's estimated population is 301,139,947. So reserve assets per capita are $221.55.

China's foreign reserves minus gold were $1,202 billion in March. The World Gold Council says China has 600 tonnes of gold, and at today's price of $21,471.23 per kilo that's worth another $12.88 billion, making a total of $1,214.88 bn. China's population is estimated at 1,321,851,888. So China's reserves per capita are $919.07.

Using income statistics I quoted on August 9, an American's share of his/her country's reserve assets is worth 0.5% of per capita GDP; the equivalent value for a Chinese is 45.95% of nominal per capita GDP. But a dollar buys more in China: adjusted for purchasing power (PPP), Chinese reserve assets are worth around $5,254 per head.

So comparing national reserves only, China is 18.2 times richer than America in absolute terms, 4.15 times richer per capita in nominal terms, and 23.72 times richer per capita in terms of purchasing power

They worked for it. But, now what?

UPDATE

Here's a note to the US reserves statement that confuses me:

Treasury values its gold stock at $42.2222 per fine troy ounce and pursuant to 31 United States Code 5117 (b) issues gold certificates to the Federal Reserve at the same rate against all gold held.

Can I buy some at this price, please?

Don't get mad

Adrian Ash in the Daily Reckoning Australia today, passes on some facts about the drop in US mortgage underwriting standards:

...mortgage underwriting changed beyond recognition between 1998 and 2006, as First American Financial recently reported:

* Adjustable rate mortgages as a percentage of new mortgages rose from 0.7% to 69.5%;
* Negative Amortisation loans - where the principal owed actually increases over time - rose from 0% to 42.2% of the market;
* Interest Only home loans - where the borrower only has to cover the interest due, leaving the principal for repayment sometime in the far future - rose from 0.1% to 35.6%;
* Silent Seconds, issued on the back of outstanding loans to the most vaguely-related people, rose from 0.1% to 38.7%;
* Low Documentation - where the greater the lie, the greater the loan - rose from 57% to 79.8%.
In short, the US mortgage market switched from cautious Fixed-Rate borrowing to head-in-the-sand ARMs...while the underlying debt was left untouched or actually grew larger...as borrowers struggled to meet just the interest alone after fudging the numbers to bag a loan they could never repay.

Most shocking of all, as Robert Rodriguez of First Pacific Advisors has noted, "is that the origination volumes for the last two years, when the most egregious deterioration in underwriting standards occurred, total more than the previous seven years of originations combined."

And this poor-quality debt has been sold to pension funds, very carefully staying just under a crucial limit:

"24% of all the hyper-leveraged assets managed by large hedge funds (US$1 billion or more) internationally, belong to pension funds and endowments," says a June 18 report from Greenwich Associates, as quoted by Paul Gallagher in the Executive Intelligence Review. "This average is just below the 25% limit at which an individual hedge fund, under the [US] Employee Retirement Income Security Act (ERISA) as modified in 2006, becomes an investment advisor with fiduciary responsibility for the pension fund doing the investing - something hedge funds obviously do not want to do."

More than that, pension funds have also stumped up one-fifth of the money held in 'hedge funds of funds', the aggregating super-funds run by many large banks. In first-half 2007, around 40% of current flows into the hedge fund industry has come from pension funds. And "as pension fund money is coming in," says Gallagher, "it's allowing 'smart' money to get out."

...Numerous reports, including a new one from Chicago-based Hedge Fund Research, Inc., have shown 'high net-worth individuals' reducing their net hedge fund investments by half, between 2006 and 2007 - investing instead into real property and stocks. They now account for only about 20% of the assets of hedge funds, which were supposedly made for them."

Instead of high-net-worth billionaires, it's now Joe Public left holding this junk, thanks of course to his well-paid retirement fund managers...

Giving control of your money to a financial "expert" might indeed prove the most foolish decision of all.

To me, this is outrageous. I've written earlier about a brokers' meeting I attended in 1999, where a rep from a technology fund burbled enthusiastically about the "super-boom" to come, and how I felt that the smart money was looking to use us to sell their holdings to suckers. And I think the same happened with the Lloyds of London scandal - advisers were encouraged to help their clients get a seat on what they thought was the gravy train, when the insiders knew it was the vinegar bottle. Now it seems we've seen effectively a raid on pension funds.

I sometimes suspect that the money system is not for storing wealth, but for stealing it.

The authorities should be busting the offenders, not bailing them. We should pay off depositors so they can put their savings elsewhere, re-educate naive financial advisers and institutional fund managers, and bankrupt the swindlers.

Here in England, London's Central Criminal Court has a motto above the entrance:

"Defend the Children of the Poor & Punish the Wrongdoer"

If I were an American, I'd be asking questions about justice and the rule of law: does the nation still protect the weak against the strong? Meanwhile, now that you know how the game is played, find a way to win honourably.

.................... A South Sea Bubble playing card

Thirty donkeys and a boiled frog

The Mogambo Guru (Richard Daughty) says that a modern US dollar buys what you could have got for about 2 cents in 1913. The same is true of the UK.

The question is, can this go on indefinitely? Is it like slowly boiling a frog, or will the frog never die? Doomsters are looking for a final cataclysm, but there have been periodic bubbles and busts for a very long time.

Maybe inflation is simply a slow crime, openly and unendingly committed against savers. We worry about interest rates, market crashes, insolvencies and unemployment, and miss the big story because it's so obvious:

The smuggler

Every first of the month the Mullah would cross the border with thirty donkeys with two bales of straw on each. Each time the custom person would ask the Mullah's profession and the Mullah would reply, "I am an honest smuggler."

So each time The Mullah, his donkeys and the bales of straw would be searched from top to toe. Each time the custom folk would not find anything. Next week the Mullah would return without his donkeys or bales of straw.

Years went by and the Mullah prospered in his smuggling profession to the extent that he retired. Many years later the custom person too had retired. As it happened one day the two former adversaries met in a country far from home. The two hugged each other like old buddies and started talking.

After a while the custom person asked the question which had been bugging him over the years, "Mullah, please let me know what were you smuggling all those years ago?"

The mullah thought for a few seconds and finally revealed his open secret, "Donkeys."

From UKSufi.co.uk

I think the ultimate-crash predictions are an expression of the desire for Justice to arrive, like a deus ex machina. Perhaps it's better simply not to be the victim oneself.

Or saddle 'em up for the Gold Rush?

Illustration from THE GOLD RUSH DIARY OF FRANK McCREARY (1850)

More old news

Thomas Nast: "The Comet of Chinese Labour" (1870)

The use of cheap foreign labour to undercut unionised American workers and benefit big business, is not new. But as this cartoon shows, it is easy, perhaps politic, to focus on the foreigner, who after all is merely trying to earn a living like the rest of us, and deserves decent treatment, out of common humanity.

"Pacific Chivalry" (August 7 1869)

How do we get a balance between the advantages of international trade, and the obligation of each State to look after its own people?

Dow predictions revisited

I wondered recently about the growth of the Dow relative to the FTSE since 1987, and speculated that it could fall by anything up to 50%. David Tice of Prudent Bear thought the same back in May, so maybe I'm not crazy.

Robert McHugh in Safe Haven predicted on 9 July that the Dow could be heading for 9,000 points, "although if the PPT responds by hyperinflating the money supply, it could be 9,000 in real dollars (gold adjusted), not nominal." The London Gold fix on Friday 6 July 2007 was $661.25 and the Dow at close on that day was 13,649.97, i.e. 20.64 times the gold price per ounce. Dropping to 9,000 as defined would mean a "gold multiple" of 13.61 times, or a 34% relative reduction in share prices.

Perhaps it could happen as a combination of nominal share price reduction, and a devaluation of the dollar.

Not so funny money

"By inflation you will burst - let well enough alone, and don't make it worse" (Thomas Nast, 20 December 1873)

Captions: (1) UNCLE SAM-"You stupid Money-Bag! there is just so much Money in you; and you can not make it any more by blowing yourself up." (2) Money is tight, but let it recover itself naturally, and then it will stand on a sounder basis. (3) Stimulants or inflation only bring final collapse.

The Contrarian Investor reviews the central bank intervention figures from Thursday and Friday. Totting them up, I see that's over a quarter of a trillion dollars added to the system in two days.

I cannot imagine that kind of money. But if you now invested that two-day $266.65 billion spree in US Treasury 10-year bonds at the current yield of 4.51%, it would create a secure income of over $12 billion a year.

The world's most expensive house used to belong to the king of yellow journalism. Randolph Hearst's spread is now going for around $160 million dollars. The interest on this central bank splurge would buy six of these houses every month. (At least that would be a solid support for house prices, at the top end.)

But let's put it another way. According to Jerry Bowyer in National Review Online yesterday (reproduced by CBS), the average sub-prime mortgage is for $200,000 and there are 254,000 mortgages currently in foreclosure. This works out at $50.8 billion dollars. It also means that the latest central bank cash injection is sufficient to buy out all current US mortgage foreclosures - five times over! Seemingly, it would be far cheaper for the central banks to take over this housing and rent it out.

So the real damage has been caused by the insane, or maybe one could term it criminal, leverage and speculation. The money experts are responsible for this debacle and the authorities are rushing to save them (and us) from the full consequences of their actions. This is almost a perfect example of creating a moral hazard.

Doug Casey: sounding grim and clear

A trenchant interview with Doug Casey in Financial Sense today. Some highlights:

At some point there’s going to be a panic out of the dollar. When it happens, it’s likely to be the biggest financial upset since the 1930s. Part of the question is what they’ll panic into. The euro? As I have said many times, if the dollar is an “I owe you nothing,” the euro is a “Who owes you nothing?”...

If an American doesn’t get significant assets outside the U.S. now, it may be impossible in the future. The best thing to do is buy real estate abroad, since it’s currently not reportable, like bank and brokerage accounts, and they can’t very well make you repatriate it...

We’re now experiencing a lot of monetary inflation, which eventually will be reflected in price inflation. What’s really going to tip this over the edge, however, is the rest of the world deciding to get out of dollars. A lot of those $6 trillion abroad are going to come back to the U.S., and real goods are going to be packed up and shipped abroad. Inflation will explode...

Markets are about trade... At some point the Chinese will want payment in something other than dollars. In the meantime the yuan will go higher...

What do I think is likely? Certainly a depression, probably of the inflationary type. But if there are widespread defaults in the mortgage market because of a housing bust, hundreds of billions of dollars worth of buying would disappear, which is deflationary. You could have both things happening at once, in different parts of the economy...

I hate making predictions, but if things continue down this path, I think we could see gold going over $1,000 within the next 12 months, and maybe even before year-end. And then the mania starts for the mining stocks.

Funny money to the rescue

Stanley Berkeley's "Gordons and Greys to the front", also known as the Stirrup Charge at Waterloo; a deed to stir any man's heart. Apologies for the trivial use.

Friday: what looked like a hairy day on the Dow saw a rescue in the last hour of about 80 points. Was it the vast volumes of cash shovelled into the system by central banks, or the fabled Plunge Protection Team (aka Ronald Reagan's Working Group on Financial Markets? If only we all had such understanding bankers.

Could the Dow drop 50%?

"Two views make a market," goes the adage, so there's no "right" value for the Dow. But as I showed yesterday, the Dow has had an extraordinary rise in the last 20 years, about double what has happened with the FTSE.

It doesn't seem related to average income (American average earnings have grown more slowly than in the UK); if it relates to greater inequality of income, then presumably if the market turns, rich bears will be capable of pushing it down as fast as it rose. And I doubt that American multinationals have exploited subsidiaries in the Far East that much more than British-based multinationals - or have they?

Or is it money invested through the carry trade, borrowing cheaply from Japan? Then maybe it will unwind when Japanese interest rates rise. Is it the benefit of low American interest rates, thanks to huge foreign support for US Treasury securities? That love affair is coming to an end.

Let's do a thought experiment. 1987 seems a reasonable base year for our measurements, since the markets weathered the "Crash" of October and still ended up ahead by the end. From the end of 1986 to close of business this last Wednesday, the FTSE had grown by some 280%. That works out at around 6.7% capital growth compound per annum, for the whole period; add-in dividends and the reasonable investor should be satisfied.

If the Dow had done exactly the same as the FTSE, it would have grown from 1,895.95 to around 7,200. Instead, it closed on Wednesday last at 13,657.86.

Maybe there's still a lot of air in that balloon.

Reading the signs

I have often wondered about chartists - investment analysts who look for patterns in trading to predict future developments. Here's a video posted on YouTube by Inthemoneystocks.com, an outfit set up this year. The report comments on yesterday's dramatic drop in the Dow.

Sometimes I think it's like astrology; but there may be a grain of truth in it. If relevant market information is already known, then (barring catastrophic surprises) some change happens because of the variable mood of the investors and their predictions of each others' behaviour. Perhaps this chart-reading is less a science and more a pragmatic art related to mass psychology and game-playing strategies.

It's an ill wind... Marc Faber cheers up

As the stockmarkets gyrate, Marc Faber is still optimistic about Asian real estate. Tientip Subhanij, in today's Bangkok Post, says:

The optimism over Asian property has been tested in recent months following the volatility in the global equity markets. The woes of the US sub-prime market have already started to shake confidence. Experts have predicted a major crash in US real-estate prices that would trigger defaults and spread the contagion to most emerging markets.

Many with true faith in Asian property, however, dispute any suggestion of an overheated market in the region. Their contention is that the party has just started for regional property, given that prices in many areas have yet to exceed the peaks they achieved before the Asian financial crisis in 1997.

Marc Faber, the well-known author of Tomorrow's Gold: Asia's Age of Discovery, also believes that while stock markets are vulnerable, Asian real estate presents tremendous opportunities. He thinks that most property assets in Asia are still far below their pre-1997 highs.

Sound counsel

Today's Daily Reckoning (I've just received it by email) offers some tips for managing your wealth in the current circumstances:

When trends turn negative, it is better to buck them...to head in a different direction. This is particularly so when the bad trends approach their inevitably catastrophic consequences.

That is what we think may be coming soon - with falling asset prices and falling standards of living in America, and probably in most of the other Anglo-Saxon countries. This is not a time to 'go with the flow,' in other words. The flow will not be going where you want to get.

As a practical matter, the course of action that is best in easy times is essential in hard times. Here, we spell it out for you:

First, you should focus on your own private business...or your own source of revenue. (Bonds, rents, retirement fund, dividend yields...whatever.) Make sure it is solid, protected, efficient and productive. Make sure it is something you understand...something you can see with your own eyes, run by people you trust. If you don't really understand it...or if it involves any form of "enhanced leveraged credit"...dump it.

Second, own the property you want to own, not the property you're hoping will go up in price. Begin, of course, with your own house. Is it the house you really want to live in for the next 5, 10, 20 years? Think long-term; the housing slump could easily last 10 years or more. Then, think about the other property you own. Would you still want to own it is if it went down 30% in price? If not, you might want to reconsider.

Third, make sure your savings and investments are diversified out of the dollar. Most experts now expect the buck to stabilise, but you can't be sure. Ten years from now, the dollar could easily be worth only 10% of its value today. Put some money into euro and yen deposits. Put some into gold too.

Fourth, once your finances are secure you can begin to think about speculating. But don't confuse speculating with investing. You speculate for entertainment, not as a serious way to finance your family. Are stock prices going up or down? You can't know. Nor can you know what prices land, commodities, currencies or anything else will sell for in the future. Don't speculate with money you're not prepared to lose.

This all seems pretty sensible to me, especially since the Dow's dropped 300 points.

UPDATE

Dow down 387 at close.

Is the Dow more overvalued than the FTSE?

I've compared the growth of the Dow and the FTSE with the increase in national annual average earnings in each country. As you see, the Dow has advanced much more rapidly.

UK earnings are calculated as 52* weekly wages. UK stats here, USA stats here. Dow and FTSE stats from the Yahoo! finance website - see sidebar.

Globalisation - a race we can't win

To put it another way, how much more does a Chinese have to earn, to live well and still undercut America?

In the sheet below, I compare six countries in terms of nominal per capita GDP (in US dollars equivalent). These have to be reinterpreted in terms of purchasing power parity, i.e. if local prices are lower, you can enjoy the same things for less money. (Nominal and PPP terms are taken from slightly different IMF surveys, but you get the idea.)

The last couple of columns answer the question, "How much income would each national need, to match America's standard of living?"

Doubtless there's problems with the methodology - PPP may well change as each country's nominal GDP increases. And it seems clear that the whole world can't live exactly like Americans do today. (It's also interesting to note that pricey, high-tax countries like the UK and Japan can't catch up with the USA without exceeding the latter's per capita GDP.)

But on these figures, China could match American living standards, on a quarter the income. So the low-pay trading advantage it enjoys is huge now, and is likely to remain so.

And look at India and Vietnam - they'd only need about one-fifth American per capita income to have the same in PPP terms. In fact, they could out-compete China in labour costs, which is one reason for China to move away from labour-intensive work like trainer-stitching, and towards heavy industry.

So Vietnam undercuts China undercuts America...

And given India's enormous population, its higher proportion of cultivatable land (compared with China), its well-established political and legal institutions, and its many millions of English-language speakers, it may be that India is the economy to watch this century.

IMF per capita GDP figures quoted from Wikipedia here (nominal) and here (PPP).

Subprime worrying Europe

Looking at the German stock exchange (^GDAXI in the sidebar widget), the market has opened lower. For Reuters comment, see here.

UPDATE (10.08 a.m.)

The FTSE is looking skittish, too. As Reuters reports: "Richard Hunter, head of UK equities at Hargreaves Lansdown [says], "... as a general rule of thumb, we've certainly been following (Wall) Street on the way down although not necessarily on the way up."

Income inequality rising in China

As China industrialises, the difference between rich and poor is rising, as measured by the Gini Index. (The above chart is from the Wikipedia entry. 0 is perfect income equality, 100 means all the income is held by one person. ) The Gini score for China is around the same as for the USA.

By contrast, China's very rich neighbour Japan has the lowest Gini rating in the Far East, similar to Australia's. It seems possible to achieve prosperity without great inequality.

Speaking of neighbours, see how France's very high score in the 1950s has plunged, whereas the UK's has risen steadily since the 1980s. We in Britain are now significantly more unequal than the French, and far more so than the Belgians and Italians.

Gold and other commodities?

For those who want to hear from the bears on their bullish attitude to gold and natural resources, here's Monica Day in The Rude Awakening last Friday:

Be Fearful, Be Brave - By Monica Day

There's a fundamental rule about investing - you've probably heard it before: Be brave when others are fearful, and fearful when others are brave.

Bill Bonner, editor of Daily Reckoning, opened the Eighth Annual Agora Financial Investment Symposium by suggesting that most people are braver than they've ever been. And that means the rest of us should be very, very afraid.

He's right, of course. Hedge funds are taking in more money than ever…despite the questionable nature of their holdings. Twenty thousand new condos are under construction in Miami…despite the current crisis in the housing sector and the ticking bomb that is subprime lending. The Dow is hitting new highs…with some mainstream commentators calling it the greatest economic boom ever.

Indeed, Bonner agrees it is "great." But more like how the "Great War" and the "Great Depression" were great.

It begs the question - what should you do when you're fearful?

"Nothing," Bonner explains. But that's hard when you have money.

So what exactly constitutes nothing?

If you're a regular reader of these pages, Bonner's answer won't surprise you a bit: Buy gold.

Doug Casey…the Mogambo Guru…and a number of speakers have agreed. Although gold is already up to a 27-year high, it still seems cheap compared with the state of the economy - and the risks the market is facing - right now.

Doug Casey ran through a list of other asset classes and gave his reasons for not wanting his money in them, and he came to this conclusion:

"Where should your money be? GOLD! That's it. Honestly. I've looked at everything and anything - I'll buy anything if the price is right. Gold isn't just going through the roof - it's going through the moon. Mark my words, the gold bull market hasn't even really started…."

And of course, the Mogambo Guru had his own unique way of making a gold recommendation:

"Run out and load up on gold…and in the future when gold prices are astronomical and there's chaos all around you…you'll look around you and notice that you're rich and everyone else is poor and you'll say, wow, that Mogambo dude was right. It's a shame he was such a hateful, detestable little man. And you'll be right…but you'll be rich! So who cares…"

Of course…the "buy gold" line of thinking was not unanimous. Some of the experts and analysts at the Symposium offered worthwhile alternatives to simply buying gold. Natural resource expert Rick Rule was one of them.

Rule believes that you must be brave if you're going to invest in natural resources. Not crazy, mind you. But brave. Meaning you have to be a discriminate investor. You must buy when others are selling, sell when others are buying. This tactic, Rule admits, "is psychologically hard, but functionally easy. And it's the only way to make money consistently in the volatile resource markets."

Byron King, editor of Outstanding Investments, examined investment opportunities among oil and gas stocks. Because the world is no longer awash in oil, King declared, the energy sector - both traditional and alternative - will be awash in great opportunities.

The "cheap oil" days are over, he warned, which means the energy-dependent American lifestyle will become costlier to maintain…maybe much costlier. "We've invented the cheap-energy system that has given us prosperity and freedom," King explained, "now we begin the descent. We'll either have to invent our way out of it, or go back to the way it was before."

He was talking, of course, about our petroleum-based economy… in the face of Peak Oil. Once mocked, denied and ridiculed, the realities of Hubbert's theory are now coming to pass as, one by one, the world's oil fields pass their peak production rates and ease into decline.

If people like Byron King and Bill Bonner are right, the shock of recognition is going to come. But the flip side of this looming societal trauma, says King, is that all kinds of energy companies will make all kinds of money.

Our resident Maniac Trader, Kevin Kerr, also banged the natural resource drum - but to a slightly different beat: Food.

More specifically - how in the world is China going to feed all those people? Even with its one-child policy in place, the population of China is expected to go from 1.3 billion today to 1.49 billion by 2025. But only 11% of China's land is arable farmland. Compare that with 26% in the U.S. to feed a smaller population and you can start to see for yourself: China is in desperate need of a solution.

Plus, it is struggling with other issues. Combine factors such as soil erosion, inadequate water supply, lack of qualified labor for farming, lack of modern farming equipment and methods and extreme weather patterns, and you've got a darn good crisis in the making. But crisis spells opportunity.

A lot of bad things might happen in the world. Some we can foresee, while others will be like the proverbial Black Swan - completely unanticipated. But if you pay attention…and play your hand right…the bad things shouldn't happen to you.

Doug Casey said it best…

"Internationalize yourself. Keep your citizenship in one country, your bank account in another and live in another…treat the world as your oyster."

Why gold?

The Market Oracle yesterday and Gold Seek today both feature an article by Michael Kosares from his own site (USA Gold) on why he thinks you should own gold.

One reason is the fecklessness of the US Government:

"...the national debt stands at $8.9 trillion - nearly $30,000 for every man, woman and child in the United States. And there appears to be no end in sight to the fiscal madness. The debt clock ticks non-stop at the rate of about $1.3 billion per day.

I should point out that there is a difference between the "deficit" and "additions to the national debt." The deficit often quoted by politicians and the mainstream press is discounted by borrowings from the social security fund - a machination meant to dilute the real budget deficit which is the actual addition to the national debt."

I only knew recently about this business of putting their hands in the social security till and leaving an IOU. That is disturbing, because of the desperation it implies. Wasn't it the financial cost of the First World War that led to the raid on British social security funds and the switch to a rob-Peter-to-pay-Paul system?

Kosares starts his article with two quotes (I've added the sources):

"[U]nder the placid surface there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it. . . We are skating on thin ice." - Paul Volcker, Former Chairman of the Federal Reserve (Washington Post, 10 April 2005)

"[W]e live in a globalized environment and in a country which has enormous fiscal and external deficits. So you have to figure out some way -- which I have not done I might add -- to protect yourself if we should have a real currency problem here." - Robert Rubin, Former Treasury Secretary (interview with Kim Schoenholtz, Citigroup New York, 10 October 2006)

He discusses 6 trends: the US National Debt, the trade deficit, dropping real rates of investment return, derivatives, debt to foreigners, the US dollar's decline.

The conclusion, obviously, is that in times of doubt and distrust, gold will act as a haven for real wealth, as it has done in the past. "Price appreciation... is a sidebar to gold ownership. The main story is gold's asset preservation qualities."

More on Brad Setser

Further to the last, it's worth struggling through Brad Setser's presentation to the Congressional committee even if (like me) you're not an economics buff.

In essence, he says that America has gotten away with its continuing trade deficit over the last few years, for several reasons:

• the effective interest rate on foreign debt held by the US, is higher than on loans made by foreigners to America


• foreign equities have had higher yields and better capital appreciation, so US overseas investment has done better than foreigners' share holdings in America


• the weakening dollar has amplified the effects in both points above


• foreign central banks' willingness to buy US debt has kept US interest rates low, making Americans' debts easy to service and fuelling share and property booms

But it can't go on for ever. Either America's debts will continue to increase, or foreign sovereign wealth funds will buy more and more equities, or both. If foreigners slacken in their support for US debt, interest rates will rise; and losing equities to foreign owners takes away from America's future wealth and income.

Setser concludes:

The US will likely both have to sell more equity to the rest of the world and pay a somewhat higher interest rate on its external debt than it has recently...

While rapid central bank reserve growth and large official financing of the US deficit can help the US postpone the necessary adjustment, the longer the adjustment is deferred, the greater the long-term risks...

Bringing the US deficit and emerging economy surpluses down without tremendous costs will also take time. If the US and the world are to adjust gradually, they need to get started.

Yet again, I wonder whether the UK's enormous purchases of US dollar-denominated securities since June 2006 make sense for Britain.

Another thought: seeing two late market interventions last week, Dan Denning in The Daily Reckoning Australia (3 August) speculated that there may be "...in the financial market a buyer of last resort who comes in to goose the indexes at critical times, when investor confidence is especially fragile."

Rather than the Plunge Protection Team, could it be foreign sovereign wealth funds buying-in on the dips? Maybe that's why the Dow has bounced back 286 points today, as I write.

China close to owning $1 trillion of US assets

This graph is from evidence given by Brad Setser (of Roubini Global Economics) to Congress on June 26. His presentation was on US debt to foreigners and the economic vulnerability that it implies. The full PDF document can be found here.

Noriel Roubini himself theorises that the US is approaching a Minsky turning point - i.e. a credit crunch - as reported in FXStreet last Friday.