The average American has only gained wealth in the last five years because his house rose in price. Now even that is going away. And unfortunately for him...and for the US economy generally...he already spent the wealth that is now disappearing. Each year, the MEW (Mortgage Equity Withdrawal) grew higher...until it reached a peak in 2005/2006. Consumer spending rose too – and pushed GDP growth for the economy. Housing contributed 90% to 100% of the gains from the last five years, according to some estimates. But this year, MEW has been cut in half...and house prices nationwide are falling, for the first time since the Great Depression.
While wages in the USA haven’t risen in 30 years, in Asia they’re going up about 10% per year. The Asians are making money...and getting richer. And in the process they’re accumulating huge stacks of dollars. Many of those dollars end up in the new Sovereign Funds – immense private equity funds owned by governments. Lenin said that capitalists would sell the ropes that he’d use to hang them. Well, the communist Chinese are ready for a buying spree. Currently, those funds have about US$2 trillion in them. They’re expected to have about US$17 trillion by 2010 – enough to buy every publicly-listed company in America...with change left over.
What will they do with all that money? Well, what would you do?
Yesterday, the dollar hit new record lows. The euro rose to nearly US$1.42. Since we live in Europe...and pay our bills in euros...but earn our money in dollars...every day, your editor loses more than he makes. His dollar assets go down. He’s getting tired of it. Surely, other dollar holders/earners are too – including foreign treasuries. What will they do? They will try to trade their dollars for something solid, while they still can.
Companies. Land. Gold.
Whatever they can get.
What they will do is to use their paper US dollars to buy America’s valuable assets.
The dollars, of course, are essentially worthless. The United States can create as many as it wants at negligible cost. But the companies...the factories...the land...the resources – those are really valuable. When the foreigners gain ownership, Americans’ own wealth – and independence – is reduced.
What did you expect? “The borrower is slave to the lender,” it says in the Bible. Welcome to captivity.
Bill Bonner
The Daily Reckoning Australia
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Sergio on 2 February 2008:
Just curious, where'd you get the numbers for "US$2 trillion in them. They’re expected to have about US$17 trillion by 2010"?