Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

Michael Pettis: U.S. is "likely to be swamped by a tsunami of foreign capital"
Howard Richman, 7/14/2010

In a very clear-thinking blog entry, Michael Pettis explains that the biggest danger to the American economy is that the world's mercantilist countries (he calls them the "capital exporters") are flooding the U.S. with foreign capital. He writes:

The US, in other words, is not likely to face the “nuclear option” of a Chinese disruption of the US Treasury bond market. It is far more likely to be swamped by a tsunami of foreign capital. This tsunami will bring with it a corresponding surge in the US trade deficit and, with it, a rise in US unemployment. It will also force the US Treasury to increase the fiscal deficit as more of the jobs created by its spending leak abroad.

But there is a good side to the flood, if you are a stock market investor. He predicts that the inflow of capital will drive stock prices upwards:

All this may turn out to be very bad for the US economy, but in the past massive capital recycling has usually been very good for asset markets. Might we see a surge in the US asset markets, at least until next year when Congress starts getting tough on the trade deficit? I would be willing to bet that we do.

So there you have it. American policymakers are leading the United States to even higher unemployment, forced upon the United States by the mercantilist countries.