March 17, 1989
"Financing the National Gluttony"
San Jose Mercury News
By Timothy Taylor
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LAST week, the news was that Japanese investors had bought $16 billion in U.S. real estate in 1988; about one-third of that total was in California. This week, a Japanese investor bought Shaklee Corp., a San Francisco-based company specializing in cosmetics and household products.

In fact, Japanese investors seem to be popping up in the news so often that some weeks you begin to wonder how it will feel when we all have to start paying the rent and the utility bills in yen.

Of course, it isn't just Japanese investors. It's British and German and Canadian and almost any other nationality you can name. The Commerce Department announced on Tuesday that the improved trade deficit last year still hit $135 billion. The net debt owed by the United States to foreign investors is now more than half a trillion dollars.

The growing debt is raising a number of fears about its political consequences. How long, sensible worriers ask, until the United States has to kowtow to foreign bankers like its debtor cousins, Mexico and Brazil? What happens when foreign investors own large chunks of real estate? When they own banks and can make decisions about what businesses receive credit? Or when they buy up new companies and new technologies?

Felix Rohatyn, financial savant and senior partner at Lazard Freres & Co., gives a particularly powerful statement of these fears in the most recent issue of Foreign Affairs. He writes:

"The control of a large enterprise carries with it the ability to make decisions determining questions of worldwide plant-site selection, worldwide supplier selection, product design, R&D siting and control and management development. These can have an important national impact, as more and more companies are bought by foreign interests."

At least so far, this sort of fear is exaggerated. Of the total foreign investment in the United States, only about one- sixth is in the form of direct private investment in businesses or real estate, another one-sixth is investment by foreign governments, and the remaining two-thirds is in the form of private foreign investment in financial assets like U.S. Treasury securities or various kinds of bank deposits.

Of course, every time Japanese investors buy a local corporation or piece of land, it becomes a news story. When American companies buy abroad, on the other hand, you don't usually hear about it.

But the aggregate figures (from the Department of Commerce) show that total U.S. direct investment in foreign companies and land is still about 20 percent higher than direct foreign investment in U.S. corporations and property. In addition, total Japanese investments in U.S. corporations and property is still much lower than that of investors from Great Britain or the Netherlands.

In short, while there seems to be a general American tendency to see trade problems as some sort of Asian conspiracy to dismantle American industry, the truth is that direct investment in U.S. business is spread out among investors from many countries, not concentrated in the hands of some ill- intentioned cartel. Also, about five-sixths of America's foreign debt is in financial assets, where the issue of direct control over industrial policy does not arise.

The real story behind America's growing foreign debt is how two economic scenarios which were pretty much taken for granted before the 1980s have changed.

The first scenario was that capital-rich countries with expensive labor, like the United States or Japan, were expected by economic logic to loan money to capital-poor less-developed countries with cheap labor. The less-developed countries would invest the money and export products. The richer country would receive cheaper consumer products, and its loans would be repaid. Everyone would benefit.

The second scenario was that if the U.S. tried to consume more than it produced -- say, by running a large budget deficit -- there would be too many dollars of demand chasing too small a supply of goods. Inflation would result, preventing the country from consuming more than it produced.

The integrated world economy of the 1980s seems to have removed these constraints on national gluttony. For the first time, the leading economic power in the world is able and willing to consume much more than it produces, by borrowing money from abroad and buying products produced abroad.

With current trends, the U.S. net foreign debt will reach $1 trillion in four or five years. If the average foreign investment pays 6 percent, then paying the interest on this accumulated debt would cost about 1 percent of total U.S. GNP, every year, forever.

One percent of GNP is not chicken feed, but it may not be enough to cause the kind of crisis that will pressure the United States to reduce national consumption, either by cutting government budget deficits or increasing private savings. No one really knows how high the debt needs to climb before it creates such a crisis, but the way things are headed, we're going to find out the hard way.

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