Don't write off America yet

Tin-pot dictators around the world are threatening to pull their US government securities and bond investments. Some commentators are even comparing America's problems with those of Robert Mugabe's Zimbabwe. Americans, they say, may soon be spending a million dollars for a loaf of bread.

President Obama has been running around Europe this past week asking G-20 and other European leaders to re-liquify their financial systems and economies with stimulus packages similar to his county's US$780 billion (and counting).

Although it is reasonably clear that the US is printing money to finance its bail-out and will run trillion-dollar deficits for the foreseeable future, the hard facts show that the world's leading economic power is a long way from becoming a basket case that everyone will be running away from.

In his bestselling book, "The World is Curved", David M Smick explains succinctly that the US has suffered various forms of financial and economic deficits for more than two decades. "Many have predicted a falling dollar," he said.

These people, Smick said, have, however, underestimated the US economy's ability to import capital. "They have ignored the US economy's dynamism and its role as an international safe haven. These sceptics only focused on the size of the current account deficit," he said.

Economist David Hale, who has been a frequent visitor to Bangkok, said that dollar sceptics fail to realise that US asset markets are still too large and flexible for there to be a sustained interruption of capital inflows and an enduring dollar decline. However, he also caveated the above assertion by saying that US policy-makers could destroy the current advantage by foolishly impeding capital flows - abruptly making the US a less attractive investment destination - or by outright restrictions on foreign capital. We all remember China National Offshore Oil Corporation's bid for Unocal.

A closer look at some of Smick's hard numbers presents a fairly compelling view that the US is not going away soon. Although foreigners own more than $2.2 trillion of US Treasury notes and bonds and are expected to finance the US recovery by buying more, these amounts pale in comparison with American householders' net worth of $57 trillion. Their huge collective net worth will still be substantial even after the current crisis eats into it voraciously.

Roger Altman in a recent "Foreign Policy" article, "The Great Crash 2008 - A Geopolitical Setback for the West", said, at the household level, Americans have lost one-quarter of their net worth in a year, and a half since June 2007, and the trend was continuing.

"Total home equity peaked in 2006 at $13 billion and had dropped to $8.8 trillion in mid 2008," he said,

Retirement assets, America's second-largest household asset, had dropped 22 per cent from $10.3 trillion in 2006 to $8 trillion by mid 2008. "US families are shocked," he said

Despite these earth-shaking losses, one recent economic survey showed that the US remains a prime global investment target with its flexible labour force, higher education, benign political environment, innovative strategies and quality of corporate management. In the same survey, China ranked 34th.

The Asian economies after 1997, Smick said, more or less tied their currencies to the dollar by steering their economies toward becoming export machines with the US consumer as the ultimate target. The Asian economies' initial goal, he said, was to stockpile cash against future speculative attacks. However, Asian economies today only have two viable assets to invest their excess savings - the US dollar and the euro. These are the only capital markets that can absorb that much capital.

That's why we should not write off America's dominance too soon.