Beggars Can't be Choosers

The Daily Reckoning – Weekend Edition
February 25-26, 2006
Baltimore, Maryland
By Kate Incontrera

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MARKET REVIEW: BEGGARS CAN’T BE CHOOSERS

Dominating the news this week was the deal made to sell London-based Peninsular & Oriental Navigation Company to the United Arab Emirates controlled Dubai Ports World. "How can we be making a deal like this in our post-9/11 world?" wonder both Republicans and Democrats, whipping the media frenzy into high gear.

There are a few details the media is glazing over. First, it is not uncommon for foreign countries to operate U.S. shipping terminals; in fact, China already runs a terminal at the Port of Los Angeles and Singapore runs terminals in Oakland. Second, Dubai Ports World will not be running security at the five East Coast ports that have been acquired in this deal – that will continue to be up to U.S. Customs and the U.S. Coast Guard. And third – and this is the part that you haven’t been hearing much of in the news – "America no longer has the internal wherewithal to fund the rapid growth of its economy," as Morgan Stanley’s Stephen Roach puts it.

In other words, since our net national savings rate fell to -1.3 percent for the first time since the Great Depression, we are spending more than we are consuming – and then some. This leaves us open to external funding and production, which is where our involvement with Dubai and China comes in.

"Faced with a shortfall of domestic saving, countries basically have two choices — to curtail economic growth or borrow from the rest of the world," continues Roach.

"The first option just doesn’t cut it in the land of abundance. America, in general, and its consumers, in particular, treat rapid economic growth as an entitlement. That leaves the United States with little choice other than to pursue the second option – drawing heavily on the pool of surplus global saving as the means to fund economic growth."

The United States is clearly relying on the kindness of foreign strangers – in 2005, we had a balance of approximately $200 billion of cheap, high quality Chinese goods, which expanded the purchasing power of the American consumer. Despite this, the pundits in Washington are still pushing these protectionist measures, doing their best to squash the deal with Dubai and trying to stop trade with China by imposing high tariffs or forcing a Chinese currency revaluation.

What good will these measures do for the United States? Our deficit reached an all-time high in 2205, we are in over our heads in debt, we aren’t saving anything and incomes have actually decreased – if we don’t get help from China or Dubai, we’re going to have to get it from another foreign country.

"It is short-sighted protectionist measures – like the ones being pursued by members of Congress – that helped precipitate the Great Depression," says Capital and Crisis’ Chris Mayer. "The more difficult politicians make it to do business in the United States, the more they risk triggering global depression and economic stagnation."

Kate Incontrera
The Daily Reckoning

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THIS WEEK in THE DAILY RECKONING: In the United States, we are in the midst of economic recovery – or so the Feds would like you to think. Find out what’s really going on in Dr. Richebächer’s essay, below…

Heroes of the Revolution                                          02/24/06
by Bill Bonner

"We read in the paper that Evo Morales, the new president of Bolivia, said
he was ‘following in the footsteps of Che Guevara.’ Either the fellow has a sense of humor, or he is as stone stupid as Che himself."

The End Of Dollar Hegemony, Part II                         02/23/06
by Hon. Ron Paul of Texas
"It is an unbelievable benefit to us to import valuable goods and export depreciating dollars. The exporting countries have become addicted to our purchases for their economic growth."

The End Of Dollar Hegemony, Part I                          02/22/06
by Hon. Ron Paul of Texas

"During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system."

Not Your Garden-Variety Economy 02/21/06
by Dr. Kurt Richebächer

"The U.S. economy’s downturn in 2001 had no relationship or similarity whatsoever to the customary ‘garden-variety’ cycle. Credit growth, far from slowing down, accelerated as never before."

Desperate Times Call For Desperate Measures           02/20/06
by The Mogambo Guru

"More and more investors are becoming distressed in today’s unstable and uncertain economy. However, there is a silver (no pun intended) lining in all of this. The Mogambo Guru explores…"

FLOTSAM AND JETSAM: Beyond all the politics involved in this deal with Dubai Ports World, lies a bigger issue: the health of the U.S. economy. Chris Mayer explains…

Getting to the Real Issue
by Chris Mayer

Frankly, the biggest risk in port security stems from where the containers are loaded, not unloaded. America’s ports receive containers from all over the world. We inspect less than 5% of these. The one good thing that may come out of this is for people to note the relatively lax security at America’s ports – regardless of who runs them.

There is so much involved in this issue, and most of it is political. It smacks of political opportunism on the part of Congressional members and governors posing for midterm elections. It’s a chance to separate themselves from a weak, unpopular president and to appear tough on terror for their constituencies. It’s political opportunism mixed with racist overtones.

But beyond the politics of it all – which is not really my beat – is a much larger issue. And it gets to the heart of our own economy’s health.

The world is increasingly a global marketplace. The old divisions are dissolving right before our eyes. It no longer makes sense to talk about companies as if they carry a nation’s flag.

Many companies you think of as American get the bulk of their sales and profits from overseas. They may even employ more foreigners than Americans. And companies you think of as Japanese, British or whatever get the bulk of their profits from other markets as well. Money flows with relative ease across national borders. And so do people. In fact, many senior members of DP World’s management team are American. The chief operating officer is a guy named Ted Bilkey.

I know I’ve said this before. But I can’t look at our own portfolio and find a company unaffected by things happening in faraway places – like Asia.

Our economy is dependent on foreign investors. That is how we are able to sustain those enormous trade deficits you read about in the headlines. Quashing this deal puts a chill on investing in the United States.

The United Arab Emirates invested over $1 billion in the United States last year. Middle Eastern countries collectively hold over $200 billion in U.S. securities and dollar assets. And that’s a small fraction of the trillions – that’s trillions with a "t" – of dollars that are held by foreigners in other parts of the world.

Months ago, it was a Chinese company buying an American oil company that caused a big splash (CNOOC’s bid for Unocal). Today, it’s a Dubai-owned company buying concessions to run terminals in America’s ports. Tomorrow, it will be some software company with high security clearance with the Department of Defense. Where does it end? It won’t end. There will be many more deals like this as foreign investors put their dollars to work.

Making the United States a difficult, unfriendly and unreliable place to do business hurts the U.S. economy and threatens our standard of living. It’s bad for the purchasing power of the dollar. It makes living here more expensive. It will drive U.S. interest rates higher. It will erode our standard of living. And the great irony is we are no safer for it.

The biggest threats to the U.S. economy are from within closing off markets, political opportunism, corruption, a reckless fiscal and monetary policy and mob rule.

[Editor’s Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of CrisisPoint Trader and Capital and Crisis – formerly the Fleet Street Letter.