July 25, 2001

Wake-Up Call

We've been saying for months that the US economy could face major problems if foreign investors decide to fly the coop. As the slowdown continues in the US, there are fewer reasons for overseas investors to keep their investment capital here. Interest rates have been slashed 275 basis points since the beginning of the year -- slashing returns on money in US bank accounts -- yet, stocks continue to leak value like a punctured balloon -- stock earnings for the second quarter are dropping an average 17.9%. As time goes on, the US is less and less appealing as an investment!

Foreigners hold $254.1 billion in US dollars. If they suddenly exchanged just one-fourth of those dollars for yen, euro, baht, won, or ruppee, the resulting tidal wave of dollars coming back into this country would practically drown the US economy. We'd have way too many dollars to buy the same amount of stuff. It's a recipe for instant inflation -- and chaos.

Right now, foreign investment remains in the US because other countries' economies seem even more shaky. However, this could change as struggling countries compete for scarce capital. There are several tactics that countries could take to shore up their economies. Hiking interest rates is one -- Argentina has raised its short-term interest rates to 300%. At some level, in some country, those higher interest rates are going to look tempting. Without foreign investment capital, Americans would not be able to borrow or spend in the manner that they are used to -- and that will really put this economy into the gutter!

The flow of funds is currently in America's favor, but you have to wonder how long before that tide turns -- and what kind of washout will happen when it does.

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