Prosperity Won’t Last if U.S. Is Isolated From World

As currency values fall again in Asia and worries of global economic troubles increase--not to mention terrorist acts against U.S. embassies--there’s one thing you can reasonably count on in financial markets: The U.S. dollar will increase in value against the money of most other countries.

In a time of trouble, the world counts on U.S. leadership.

Ever since the Asia crisis began last year, foreign capital has been pouring into U.S. stock and bond investments--more than $100 billion in stock purchases since early 1997. That is more than eight times what overseas investors sent here two years ago. Another $200 billion in foreign investment has come into Treasury bonds.

The money has helped to lower U.S. interest rates and added to the strength of the U.S. stock market and the U.S. dollar. The dollar has slipped lately against some European currencies, but the underlying trend is strong, analysts say.

“World investors turn to dollar assets as a safe haven,” says an investment fund manager who sees global anxiety keeping capital flowing to the U.S. into next year.

In the longer term, “the dollar could be strong for three to five years,” says Tomoko Iwakawa, foreign exchange advisor to Union Bank of California, a subsidiary of Bank of Tokyo-Mitsubishi.

Then again, “there could be a major interruption, the economy could run into trouble next year,” says Albert M. Wojnilower, investment advisor to Clipper Group, a New York-based investment company. Wojnilower has a record for prediction: In 1981 he was one of two forecasters who called the turn of interest rates that has led to the longest bull market in history.

Big money and contradictory predictions. What’s going on? Money is flowing to U.S. stocks and bonds for good and not-so-good reasons, short-term and long-term reasons.

Under the category “not-so-good,” global capital has little or no alternative to investing in U.S. assets. Asia is in depression. Europe is in transition. Europe’s stock markets lack the breadth and depth of U.S. markets. That’s one reason Europeans led the investment parade into U.S. stocks. German investors alone added $5 billion in the early months of this year.

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Europe’s strongest currency, the German mark, also is in transition to the new euro. In the future, European government bonds, issued in euros, will compete with U.S. Treasury bonds for global investment, but because of technical reasons, that day is several years off.

Being a safe haven can be nice for Americans. A strong dollar and low interest rates give them increased purchasing power, and a high stock market helps their pensions. But when global anxiety pulls investment back from developing countries in Latin America and Asia, that’s not healthy for the world system. It puts too much dependence on the U.S. economy as engine for the world.

Yet there are positive reasons why global investment flows to the U.S. In the short term, the economy probably will be better this fall. General Motors Corp. is back to work and consumers will be heading into what promises to be a huge Christmas buying season. Last week’s stock market recovery, hesitant as it was, recognized this.

“We have managed our economy in recent years better than Japan and the countries of Europe,” Wojnilower says. While European countries tolerated high unemployment and Japan remained in a stall that has become a deepening recession, the U.S. economy has added tens of millions of jobs.

“There is freedom in this economy,” Iwakawa says. “Labor can change jobs. Deregulated industries can become efficient. It’s a rational economy.”

It’s an economy looking at future growth, “thanks to the echo of the baby boom,” says John Mueller of Lehrman Bell Mueller Cannon, an Arlington, Va., economic forecasting firm. Large cohorts of young people will swell the U.S. work force and consumer economy in the next decade. In this economy, expansion makes sense.

But U.S. prosperity cannot continue in isolation. Right now, the U.S. market is the customer of first and last resort for all the struggling countries of Asia. Latin America, Canada and Europe also are selling as much as they can to the U.S. That’s why the U.S. trade deficit is soaring. So far, imports don’t seem to have displaced U.S. jobs, but if the economy slows, there will be a political backlash.

Meanwhile, global conditions are worsening. Movements of the disaffected, like the terrorists who bombed U.S. embassies in Kenya and Tanzania on Friday, send an ominous signal for our times.

In Asia, the fear is that China and Hong Kong will devalue their currencies, causing other currencies and economies to spiral downward. The effects would be massive and incalculable--especially as financial markets today are interlinked by currency hedges and banking agreements. The last time the world witnessed competitive currency devaluations was the early 1930s, just before the Great Depression.

But one doesn’t have to look back that far. In the early 1980s, the U.S. currency grew stronger and stronger, and imports flooded in while exporters had difficulty. The period ended in a stock market crash in 1987.

If the stock market crashed today, the effects would be far more serious, because more of the savings of Americans and other peoples are invested in the market. Also, consumer confidence, business capital investment and Washington’s newfound budget surplus all stem in part from bull market capital gains.

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This is a critical time. But of course, given the vast resources of a world both productive and largely at peace, disaster should not be the outcome of this time. We should remember that the long postwar American vision was never of isolated prosperity. Rather it was of nations in Europe and Asia and Latin America developing economically along with the U.S. In Europe, east and west, such development is occurring today. But for Asia and for Latin America, U.S. leadership needs to be more engaged.

That is why it’s dangerous that the U.S. now seems so withdrawn, with a scandal-distracted White House and a congressional leadership that opposes loans and aid for developing economies.

The foreign investment flows that are strengthening the dollar and U.S. prosperity represent a plea for U.S. leadership, a belief in U.S. leadership. Those pleas and beliefs should not be denied.

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James Flanigan can be reached by e-mail at [email protected].

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Buying American

A dramatic increase in foreign investments in U.S. stocks over the last year and a half has pushed up share prices and the value of the dollar. Quarterly net foreign purchases of U.S. stocks, in billions of dollars:

1998

First quarter: $29.06 billion

Source: Treasury Department

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Customer List

The ranks of big buyers of U.S. bonds and stocks hold few surprises--Singapore and Japan have been net sellers of stocks this year; the bond holdings of Japan and OPEC represent reinvestment of their trade surpluses with the U.S.

TREASURIES

Major foreign holders of U.S. Treasury securities:

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Buyer Holdings in May (billions) Japan $267.0 Britain 266.0 Germany 96.0 OPEC 52.0 China 46.4

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STOCKS

Stock activity of foreign holders of U.S. corporate stocks:*--*

Buyer Stock activity in May (billions) Britain +$2.93 Switzerland +2.23 Germany +1.83 Japan -0.21 Singapore -0.67

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