The Story of 2007
The economic story of 2007 isn’t Facebook being worth
$15bn, its not the subprime mess and the resulting credit crunch, its not the
fact that the US economy seems eerily similar to where we were in 1975.
from. The capital that is propping up our companies and economy is coming from
China, The Middle East, and Russia. On Monday we learned that middle east
capital was required to shore up the balance sheet of Related Companies, one of
NYC’s largest real estate developers. Today, we learn that Morgan Stanley is
getting bailed out to the tune of $5bn from China Investment Company.
Its been happening for a while, but we are seeing
it in droves now. If you need capital, lots of it, don’t look here in the US.
Money is tight and assets are cheap in the US these days. Go to China, Russia,
or the Middle East. That’s where the capital is and when they look at the US,
they see a bargain.
got us into this situation, but I am not in the mood. We are where we are.
Its time to admit that the US is a global superpower in
hock to parts of the world that should make us nervous. That’s the story of 2007.
Comments (Archived):
From my article, ‘the demon bride of twiiter”, a short, on topic paragraph from deep in the post””“Our good coin is disgraced, while we wash each other’s dishes, and sell to each other insurance, and as we cede the hard crafts and professions to who will someday dominate us all from the East.…’Now what buys today a loaf, tomorrow buys a muffin, and if the Lords in your Assembly here hide from the truth, our coin will soon buy Nothing.” An eerie echo filled the conference room without a call from your author truly:“I say, the bill must be paid, whatever models you craft, must be justified, thus creating a value, a service good and well for all, besides the evil duplication of you all”. “To make a NEW THING, your legacy out here North and West, but a disgrace upon you, all who copy and echo and inflate with words, you will give away a legacy of gold.” “Heed my words, Lords of the Valley, create and truly innovate, and stop this foolish rally of the duplication of your models and the twittering of fools”.
For the ending of the story, you can read the 1987 version, which was “The Japanese are buying our whole country.” I personally just don’t see how the countries you’ve mentioned have the ability to compete with us in the long term. Russia and the Middle East have little productive capacity, and support themselves by pumping money out of the ground. China does, but only at the expense of completely destroying their environment. No one has our combination of work ethic and entrepreneurship, freedom, property rights, rule of law, and technological superiority.Besides, I’m still trying to figure out why having people want to invest in our country is a bad thing. The sovereign funds make decisions just like any other investor. When you put money in a company is it usually because they are “in hock” with boneheaded economic policies, or because you think it probably has the best growth prospects?I’m not happy about a lot of the things going on in this country either, and I agree that we should keep an eye on things like this, but i think the bear case on the USA is overstated, and I’ve never been presented with a convincing argument on why the current account deficit is so bad.
It’s bad because the Chinese can trash our economy at any time by selling off the dollar.
That’s it in a nutshell, Erik. Also, the difference from the 80’s is that the whereas the Japanese we’re challenging us economically, we’re now dealing with our economy coming increasingly under the control of countries that are also political and military rivals.
in 1990 we weren’t dumb enough to finance invasions of the Middle East by cutting taxes and borrowing from the Chinese.Compete? The way the US ‘competes’ is by importing the brains, the brawn in the form of Mexicans, and the capital (since Americans choose not to save). And we still end up with a giant trade deficit.The Chinese accumulation of $1 trillion of foreign reserves has been a free lunch for the US consumer.The golden rule… he who has the gold makes the rules.My more talented Wall Street friends end up in London. Hard to do business with Asia on NY time.Anyone who doesn’t think this is the Asian century is rather foolish, and should learn how to say ‘Shoeshine, sir?’ in Mandarin.
Joe> No one has our combination of work ethic and entrepreneurship, freedom, property rights, rule of law, and technological superiority.One of the strangest attributes of human nature is its ability to create framesets that evidence can’t change. “IBM will be king forever.” Your statement sums up the thinking of many Americans. It’s the curse of success: we’ve done well that I’m sure we’ll always do well. Those are famous last words for a company, and for nations as well. Please get a passport and travel. You’ll change your mind quite quickly.And here’s why the current account deficit is so bad: because we haven’t used our debt to increase production but instead to keep our standard of living constant when it should have declined. I’m sure you’re clever. You know there’s good debt and bad debt. The US is drowning in bad debt. There’s an Economic Winter on the horizon and we’re going into it having burned all our firewood trying to make Autumn feel like Summer.
I would like to second. Beating your chest over how great the American work ethic is gets us nowhere. There are still Portsmouth NH shipyard workers sitting on barstools 30 yards away from the padlocked gates of that once great shipyard, saying, “we make the best ships, we will open again”. They should have just moved to Newport News, but Newport News has reduced its workforce by 50k.Also, the Japan era angst (Form the People Who Brought you Pearl Harbor, forget author), had everything to do with the shrinking of the medium and heavy industries, and electronics manufacturing, which the USA owned lock stock and barrel, no more. We gave these away for a service economy and low lending rates via subsidized debt and a near zero savings rate so we could buy Flat Screen and memory chips designed here and built there.Now, in this ephemeral knowledge economy with YASN (Yet Another Social Network), and YAVSS (Yet another video sharing site), we are squandering our equity while real mid-tier productivity sectors go unfunded because the Partners can’t feel left out of the frenzy. It is madness, and many will not get paid back.We have seen funding of famous personalities, Silicon Valley Undertakers, raising one or two rounds for companies that never will make a dime, and who have been to the well 5 or 6 times and those ventures never made a dime. I asked one such famous capital magnet,’how do you do it?”, he: “I find a way to hire the sons daughters friends cousins in-laws, business associates, etc. How wlse could I do it?”. He wore a 100k Patek Phillipe watch,
The really scary part is that large scale wars are not fought between militaries, they’re fought between economies.Given the state of our economy, if we end up at war with China (a far greater threat than islam) we have no other way to win but to go nuclear.
Fred, you summarized the story about Related in an interesting way saying the capital they took in was to “shore up their balance sheet”. TheTimes called it an investment and “quick cash to finance future development amid disrupted credit markets.”Does anyone know if it was more akin to a bailout?
seems like moderate duress in both casesMS had to find a white knight or shrink their business. The Chinese were willing to make a political statement. Terms seem better than Citi at first glance.Related took equity from Goldman and Michael Dell, only debt from overseas. Since it’s a private company details seem too limited to say for sure, on the one hand raised a nice chunk of change and no mention of board seats, on the other hand you have a sizable pipeline in a crappy market and it’s a crappy time time to raise money, if you’re doing it there must be some pressure to do so.
Am I the only person who thinks this is a bad deal for the new investors?It seems to me these countries are flush with capital that needs to be invested somewhere. They bought some damaged goods on the cheap.Maybe American investors are smart enough to avoid investing in companies with boneheaded management teams that cannot even understand a simple product like mortgages. Where were the board of directors during this mess?I think the bigger story is how all these financial “geniuses” that are always on the tube spouting there worthless predictions are always wrong. By my count 3 recessions were predicted this year, and the actual count was 0.We have an open system that encourages foreign investment. This is a good thing.
they got a better deal than the chumps who bought MS at 75 v. 50 today, or for that matter those smart American investors who bought Enron and Worldcom and Webvan.I’d rather be the country flush with capital than the one running around with hat in hand.that’s my quota for the week 🙂
Ummm .. America is not asking for the money, Citibank and the banks are.Would you rather have high tariffs and capital restrictions?The banks needed cash and the best deal they could find was from foreign investors. I think that is a great thing. I think it is great countries are developing wealth and able to invest it abroad. Isn’t that progress?I hope one day everyone can afford nice house in the burbs with a couple of cars and a retirement nest egg. The effects of this will be $20 per gallon gas, a higher percentage of capital coming from foreign sources, and almost no global poverty.
I’d rather have sane tax policies and monetary policies that didn’t result in immense global imbalances. (similar BTW to those seen before the Great Depression)
Spot on. I saw the announcement today on Bloomberg and just about dropped my cup of tea. Another bailout, by foreign capital. How do we get to this state? Foreign capital itself isn’t bad. What’s ominous is it coming in precisely now, because banks are so weak.
Fred – Pitching Grocio in Dubai and then London a couple weeks ago was a RIOT! LOVED the whole experience. You’re absolutely right… the mid-east IS primed for deals. Those guys are voraciously hungry. (Just wishing it wasn’t so far away and the term sheet was forthcoming… ah, patience…)
There are some positives for entrepreneurs. We’ve been doing a lot more business with Europeans who, because of the falling dollar, don’t blink at our rates. I don’t think things will be entirely peachie if the US economy tanks, but for now being a cheap outsourced service provider is good for bootstrapping. My simplistic view of outsourcing is that you send out your most menial or highly specified development. I wonder if that dynamic changes when you’re outsourcing to a community that was born and bred for innovation.
“eerily similar” to 1975 is pretty strong!
This is “The Story” only from the vantage point of American Exceptionalism; in other countries the low and high tides of capital flow are considered normal part of their integration in the world. It is a “a story”, no question, and it is symptomatic (as you pointed out) of economic policies, but also of of broader cultural currents, the chief among them being the “assault on reason” that pervades the country; the Administration, the mortgage lenders, even some of your brothers in the VC community are guilty of contempt for reality and rationality that ultimately lead to destruction of economic wealth.Fortunately, free markets and democracies are wonderfully self-correcting. We will have a new Administration by the end of next year, the irresponsible lenders will have painful write-offs, and the irrational VCs will likely not raise another fund.There is no guarantee, of course, the country may elect another unqualified President (Romney, Huckabee, Guliani), the bad VCs may manipulate their way into raising more funds and the lending crisis may deepen. In my view, however, not a very likely scenario, and certainly not something to dwell on during the Season.Happy Holidays!
Hi Fred,It would be nice if you’d give us some idea of what you perceive as the “boneheaded economic policies that got us into this situation” – I can appreciate “not in the mood” but you are one of the more financially/economically literate people in this conversation and it would help to understand what you’re trying to say.
Huge fiscal deficits, unilaterally financing and fighting a war in themiddle east, lax regulations on home lending, no policy to encourage reducedoil consumption and a move to alternate forms of energy, etc, etc
high consumer debt, consumers leveraging equity props up the economy, credit tightens, consumer markets falter, oil-producing nations stop pegging oil to the dollar, US fails to enforce trade laws with China, production continues to move offshore, cats and dogs living together, China using its surplus to buy a navy from former Soviet states…what could possibly go wrong?
Lax mortgage regulation? Are you kidding me? Mortgages are the most regulated financial instrument. If people want to leverage themselves that is between them and their lender, not the government.We do have a policy to encourage reduced oil consumption: high prices. As prices rise, consumption will decrease.Ditto for alternative energy. As oil prices rise, substitutes become more attractive.The worst thing we can do is all the hair brained subsides Congress is proposing. Ethanol enriches a few wealthy farmers while driving up the price of corn and meat (since most meat is raised using corn feed). Look at the price of beef lately.To achieve your goals we need fewer energy policies not more.
I’d rather have sane tax policy and monetary policy that didn’t result in immense global imbalances.
Me too
We could use another viiew point here, maybe from the Larry Ludlow view of the world.