While heavily indebted American consumers struggle to make mortgage and credit card payments, a larger shift is underway. News from Tokyo indicates that politicians in Japan, America's "friendly" creditor nation, are beginning to consider investing the country's massive horde of foreign reserves, in order to "take advantage of the opportunities opening up around the world" during this global financial crisis we are in.
The largest foreign exchange reserves are held by
In the earlier part of the subprime crisis, we saw high profile investing of $21 billion by sovereign wealth funds (
Ponder this: The investments last January by smaller sovereign wealth funds in
- Paulson's $700 billion bank rescue plan signed into law on October 3.
- A coordinated global rate cuts by many G-7 members and other countries last week
- The government's "no objections allowed" infusion of $125 billion capital into JPMorgan (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS), Morgan Stanley (MS) and other financial institutions which was announced on Monday
In short, every policy measure to date, however unprecedented and seemingly, "radical" at implementation, has failed to stem the economic bleeding.
So, where do we turn now? Well, recall the proverbial "rich uncle," who is perennially forthcoming with money gifts when you are a kid, lends you the extra money you need for a down payment when buying your first house, and provides half the capital you need to start a new business. As our financial crisis runs its course, we Americans as owners of over-leveraged assets in our increasingly distressed
Like it or not, for equity capital rather than just debt, American financial institutions, large corporations and our U.S. equity markets as a whole need to tap into the trillions of dollars of foreign exchange reserves on the books of governments throughout the world, and particularly the trillion dollar balances of each of China and Japan. Back in March, the House held a hearing on the role of foreign government investment in the
My guess is that our equity markets will not find a firm bottom until cross-border government-level deals are struck to convert from debt to equity significant portions of the U.S. dollar-denominated foreign exchange reserves sitting overseas in
A substantial increase in foreign ownership of the American economy is probably a lot closer than we think.