from Follow the Money

What do the US, Saudi Arabia and China have in common?

February 21, 2008

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What does the US have in common with two of its most important creditors?

One answer: all have a significant population worried about how to make ends meet right now.

China exports a ton of goods, but imports oil and grain. And the price of both is rising. Back in November, there was a story circulating - perhaps apocryphal - that some Chinese workers wanted their wages indexed to the price of pork.

The Saudis are a net exporter of oil. But not everyone has shared equally in the oil windfall. Government employees living on a constant salary aren’t pleased by rising prices ...

High wheat prices aren’t bad for Kansas, but not all that many Americans make
their living producing grain -- or, for that matter, selling US bonds and parts of some US firms to sovereign investors. Reading the Pew Survey (hat tip: curious capitalist) is a good reality check for privileged New Yorkers working on the fringes of the financial sector.

A majority of Americans cite the rising price of basic necessities as their biggest economic concern.

Not the budget deficit

Not the credit crunch.

Not falling housing prices

But rather the rising price of a take-away slice of pizza. Or its equivalent. A slice is close to a necessity in my book, but eating out is a luxury for many.

Some key findings of the latest Pew Survey:

Fully 58% of the public says that their incomes are falling behind the rising cost of living.

Overall, 24% cite concerns over prices -- with the cost of energy and healthcare mentioned most frequently -- as the most important problem facing the country.

Substantial numbers of people with very low annual incomes -- less than $20,000 a year -- say they have difficulty affording basic necessities. Nearly three-quarters (74%) say they have difficulty affording gasoline, 65% report problems affording heat and electricity, and half have trouble affording food.

The recent rise in the percentage of Americans who say that their incomes are falling behind the cost of living has come largely among middle-income and poor people. Roughly seven-in-ten (71%) of those with household incomes of less than $50,000 a year say their incomes are falling behind the cost of living, up 16 points since last September. By contrast, only a third (33%) of those with household incomes of $100,000 a year or more say their incomes are not keeping pace with the cost of living, up modestly since September (four points).

Sobering. And the rise in US prices is lower than the rise in Chinese or Saudi prices.

David Wessel’s column makes a simple but important point that flows directly from another recent poll: the leading Democratic candidates for President aren’t as warm toward globalization as Bill Clinton because a majority of the American public isn’t as warm toward globalization as they were in the late 1990s. Wessel:

if Bill Clinton were running again, he’d probably put some distance between his campaign and his eight-year presidency. It’s the voters, stupid.

In December, a Wall Street Journal/NBC News poll asked Americans whether the increasingly global nature of the U.S. economy was good ("because it has opened up new markets and resulted in more jobs") or bad ("because it has subjected American companies and employees to unfair competition and cheap labor.") By 58% to 28%, the respondents said it was bad.

By contrast, in August 2007, the question drew a much less-hostile response: 48% bad to 42% good. (The rest weren’t sure or deemed globalization equally good and bad.)

And - as Bob Davis also reports in the Wall Street Journal -- the rise of sovereign wealth funds isn’t likely to make to globalization more popular. The polling is still incomplete and Americans are not all that informed. Only 6% of Americans have heard of sovereign funds (also a useful reality check). But the US public don’t seem to like the basic idea of selling US companies to foreign governments. Davis:

By ratios ranging between 2 to 1 and 7 to 1, those polled opposed such investments in U.S. auto makers, high-tech companies, banks, oil companies and ports. The purchases of small stakes in banking giant Citigroup Inc. by government investment funds in Singapore, Kuwait and Abu Dhabi, United Arab Emirates, produced a similarly lopsided result: 56% opposed, compared with only 8% in favor.

The opposition appears to reflect a broad distrust of foreign investment at a time of economic uncertainty, rather than a specific reaction against sovereign-wealth funds.

By 49% to 25%, those polled said foreign-government investments harmed the U.S.U.S. national security. But only 6% of the respondents said they had "seen or heard anything recently" about sovereign-wealth funds. The poll was one of the first conducted on U.S. attitudes toward the funds. economy and, by 55% to 10%, that they hurt

I personally don’t think the explanation for the poll results is a lack of information. More information might only reinforce existing views.

10 years ago, the argument was that China’s population would offer Americans new markets for their goods and services. No one tried to make the case the US would benefit from China’s rise because it would allow China’s governments to buy up US companies, supplying needed capital to the US economy. But that is how it has worked out.

The US certainly exports far more debt (and perhaps soon equity) to China than goods.

Full proof won’t be available until the US capital flows data is revised following the Treasury survey, but it is likely that China’s purchases of US financial assets - bonds, companies - now significantly exceed US purchases of Chinese goods.

I find that a stunning fact.

Saudi purchases of US debt are even harder to track than Chinese purchases, but it is also reasonable to think that US spending on Saudi oil will be somewhat smaller than Saudi purchases of US financial assets. Even with oil at $100. Or perhaps especially with oil at $100.

(In 2007, Saudi Arabia added roughly $75b to its central bank’s foreign assets, and maybe 85% of that -- $64b - was kept in dollars; US imports of Saudi oil (1.675mbd) at an average price of $70 would total $43b. That would rise to $61b if oil stays at $100. Of course, oil is sold on a global market, so this is more a way to have fun with the data than anything else - so long as the Saudis peg to the dollar they would be buying a lot of dollars even if they sold all their oil to China)

The funny thing is that I am not sure that Chinese and Saudi lending to the US would poll better in China and Saudi Arabia than Chinese and Saudi investment polls in the US.

In general, democratic voters demand more spending and investment at home - not more investment abroad.

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