Of Public Debt and Private Wealth
December 27, 2006 (Steven Pearlstein - Washington Post)

In terms of the global economy, the elephant in the room for much of the last 25 years has been the large and persistent U.S. current account deficit (loosely, the trade deficit), which this year is likely to exceed $800 billion. Roughly speaking, the richest country in the world spends 106 percent of its income.

If the United States were almost any other country, we wouldn't be able to sustain this huge imbalance for very long because the rest of the world would be unwilling to finance it. But, as it happens, developing nations suddenly have more savings than they know what to do with, much of it denominated in dollars as a result of selling us inexpensive clothing and electronics and very expensive oil.

These countries know that if they were to try to exchange all those dollars for their own currencies, it would drive down the value of the dollar -- and with it, demand by American consumers for all the things they sell. Rather than accept slower growth and higher unemployment, they have decided to keep their currencies loosely pegged to the dollar by investing those trade-surplus dollars in U.S. assets.

One obvious effect of this decision is to drive up demand for U.S. stocks, bonds and real estate, which foreigners have purchased either directly or through such intermediaries as hedge and private-equity funds. Their money was a significant factor in the tech and telecom bubbles of the 1990s, the current bubble in corporate takeovers and commercial real estate, and the just-ended bubble in residential real estate. Indirectly, it also helps explain why stock prices are at or near all-time records.

AntiSpin: The idea that growing income and wealth inequality are related to the stock market, private equity, and other asset bubbles, in turn an unintended consequence of "vendor financing" of US consumers by goods exporters, is compelling. The question is, where's this all headed and when?

Tomorrow I publish the iTulip 2006 year in review and 2007 forecast. What's coming? Well, what's the opposite of a speculative, finance-based economy?