There Is No Cat - Economics 102

A huge orangupoid, which no man can conquer

Thursday, November 20, 2003

Economics 102

This is weird: there was significant economic news in the past day or so, but I can't find any mention of it on any of the usual news sources like the New York Times or the wire services or even the financial web sites. The only place that's covered it is the business radio program Marketplace on public radio, where it was the top story in last evening's program. Even my favorite lefty economically-savvy blogger, Billmon, hasn't picked it up. Basically, the story is this: foreign direct investment in the U.S. dropped by a whopping 90+% in the most recent figures. The U.S. trade deficit and budget deficit requires that a certain amount of money, about $46 billion, be invested in the U.S. from outside the country every month. This is how we finance our profligate ways. The main sources of that investment are Japan and China. Some economists have warned that if either of these governments decided all of a sudden that the U.S. wasn't where they wanted to place their excess money, we would be in trouble. This month, at least, they seem to have decided just that.

How did that happen? Well, the Bush administration, in the person of John Snow, Secretary of the Treasury, has suggested that they would like to see a lower dollar. Foreign investors, hearing this, decided that a currency that was about to drop in value wasn't a good investment, and stayed away in droves. There goes all our foreign investment. Oops!

So what? We don't need their stinkin' money anyway. Well, actually, we do. Without that money, the government needs to pay for their tax cuts some other way, borrowing money from others. To attract investors will require higher interest rates, which means the cost of borrowing for everyone, including businesses, is about to get higher. That tends to be the last thing a sputtering economy needs, and may be just what we need to tip the economy back into recession (and it's not like the current "recovery" is terribly robust to start with).

The only aspect of this story that anyone other than Marketplace seems to be covering is the dramatic drop in value of the dollar vis-a-vis the Euro yesterday, the result of investors being spooked by the investment figures. I guess it's not an easy story to explain or something, although Marketplace did a fine job of it. The rest of the journalism industry seems to be more interested in the latest financial scandal where a bunch of foreign exchange traders were arrested. Maybe all the reporters capable of writing the investment figures story were too busy covering the arrests. But this is potentially a big problem.

Posted at 1:11 AM

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Yes, I am surprised Billmon hasn't picked it up. He has been warning of what might happen if foreign investment drops for quite a while.

Posted by Elaine Normandy at 7:29 AM, November 20, 2003 [Link]

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"You see, wire telegraph is a kind of a very, very long cat. You pull his tail in New York and his head is meowing in Los Angeles. Do you understand this? And radio operates exactly the same way: you send signals here, they receive them there. The only difference is that there is no cat."

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