Capital will flow to where there's money to be made. It's just that simple. America's "accomodative" monetary policy has spurred a new wave of corporate borrowing. And where are these multinational entities deploying these new investments? Not in the United States. That money is flowing into emerging economies. Bloomberg reported on the trend in Bernanke's 'Cheap Money' Stimulus Spurs Corporate Investment Outside U.S—
“You’re seeing leakage from quantitative easing,” said Stephen Wood, chief market strategist for Russell Investments in New York, which has $140 billion under management. “That leakage is going into emerging markets, commodity-based economies, commodities themselves and non-U.S. opportunities.”
U.S. corporations have issued more than $1.07 trillion in debt so far this year, according to data compiled by Bloomberg. Foreign companies also are tapping U.S. markets for cheap cash, selling $605.9 billion in debt through Nov. 15 compared with $371.8 billion for all of 2007, before the Fed cut the overnight bank-lending rate to a range of zero to 0.25 percent...
Corporate cash sloshing across U.S. borders is an unavoidable consequence of the Fed’s low-rate strategy, Wood said...
U.S. corporations’ overseas investment in the first half of 2010 exceeded the amount that foreign firms spent in the U.S. on factories and acquisitions at an annual rate of almost $220 billion, according to the Commerce Department.
In the first half of 2006, the last year before the financial crisis, the net flow favored the U.S. at an annual rate of about $30 billion.
Capital was still flowing into the United States in 2006. There were still many suckers to be fleeced. But that's all over now.
One fact making the rounds says that American corporations are sitting on tons of cash. It's true, as the Washington Post's Harold Myerson reported on December 15th—
President Obama is meeting with the chief executives of leading U.S. corporations Wednesday, plainly seeking a rapprochement with American big business. What's by no means apparent, however, is whether our leading CEOs have any intention of reaching a rapprochement with the American people...
When Obama sits down with the CEOs, he doubtless will extol a series of recent policy moves - the tax deal, the free-trade agreement with South Korea - that business largely welcomes. He then will urge his guests to create some jobs here in the United States.
American corporations, according to the Federal Reserve, are sitting on roughly $1.9 trillion in cash at a time when private-sector hiring is stuck at microscopic levels (50,000 net jobs created last month). Small business, dependent as it is on depressed domestic consumption, lacks the funds or incentives to resume hiring. Big businesses, by contrast, are rolling in dough and registering record profits. One reason for their success is they're selling abroad - the most recent survey of the Standard & Poor's index of our largest 500 publicly traded corporations shows that roughly 47 percent of their revenue comes from outside the country.
Dallas Fed President Richard Fisher wonders whether all this "leakage" is a good thing.
In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places. The Treasury International Capital, or TIC, data released yesterday morning show that foreign interest in buying Treasuries remains robust.
Yet, far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please.
This would not be of concern if foreign direct investment in the U.S. were offsetting this impulse. This year, however, net direct investment in the U.S. has been running at a pace that would exceed minus $200 billion, meaning outflows of foreign direct investment are exceeding inflows by a healthy margin.
We will have to watch the data as they unfold to see if this is momentary fillip or evidence of a broader trend. But I wonder: If others cotton to the view that the Fed is eager to Open (the) Spigot, as proclaimed on the front page of the Oct. 6 Wall Street Journal, might this not add to the uncertainty already created by the fiscal incontinence of Congress and the regulatory and rulemaking excesses about which businesses now complain?
As an important member of the Federal Reserve system, Fisher must wonder aloud whether capital outflows "might not add to the uncertainty already created by [name your favorite disaster]." He can not just come out and say that America has been bled dry. Always on the alert for new "consumers" to sell stuff to, multinational corporations are no longer willing to invest in this dry husk called the United States of America.
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If we view America as an Empire in rapid decline, this behavior by the multinationals is perfectly understandable. Alas, few are willing to take that point of view seriously. Only in his "darkest moments" does Richard Fisher permit himself to consider the awful implications of the obvious. So he'll watch the data for now, and pass judgment later on whether Federal Reserve policy has "stimulated" every part of the world except its primary target.
Invest in the United States? Why bother? You can't get blood from a stone. One day all this is going to "end" in some sense. All we're lacking now are the gruesome details.
By. Dave Cohen
Dave Cohen writes the blog Decline Of The Empire. His commentaries cover a wide variety of subjects, including the American economy & macro-economics, the oil markets, peak oil, politics & policy, environmental issues and global warming. Dave was writing search engine software before he gave up on the industry in 2005 after 20 years as a software engineer. Dave has a M.A. in theoretical linguistics and was working on a Ph.D. before leaving The University of Texas at Austin in 1985 to do research in Artificial Intelligence. He attended the University of Chicago as an undergraduate.
