Push Versus Pull

Whether foreign capital is “pushed” or “pulled” into a country has important implications. Money that is pulled into a country does so because its investments are attractive. Money that is pushed into a country does so for a variety of factors extraneous to the host country. In this case the host country, the US, is getting money not because of the investment opportunities it provides but rather because foreign countries want to stimulate Americans to buy their goods. History shows that money pushed into a country can lead to financial bubbles and borrowing binges in the host country as it must readjust to the inflow. Think of it like giving your college age child large sums of money each week.

Economists may argue over whether money has been pushed or pulled into the US. There is no arguing that starting in the early 1980’s when the Reagan administration began dismantling regulations that foreign central banks started aggressively buying US treasuries($2.7 trillion held in the Fed’s custody account alone and does reflect Eurodollars, bank deposits, Foreign exchange swaps, Eurobonds, etc. held). We have consistently adjusted to this inflow by running record trade and current account deficits, ones that have historically brought calamity. Former Federal Reserve Chairman Greenspan remarked over four years ago how America’s ability to run deficits had gone well beyond historical norms. We have not been forced to pay the piper yet because foreign governments continue to “push” money into the US to maintain growth of their economies at our expense.

This massive inflow of capital (dollar purchases) over the last two decades has not caused a surge in our economic growth which has chugged along at only a modest rate. It has led to a host of speculative bubbles beginning with the 1987 stock market bubble and the innumerable crashes and ensuing bailouts that followed. It has also led to a borrowing binge by US consumers who are now saddled with massive debt($2.6 trillion). In other words, all this money flowing into the US has not led to a commensurate surge in US growth but has significantly deteriorated our country’s and citizen’s balance sheet and made us vulnerable. Within a few decades we have gone from being the world’s largest creditor to being its largest debtor.

The long term consequence of letting a country continue to “push” money into a host country can be devastating. China, for example, has consistently intervened in foreign exchange markets by buying dollar denominated bonds and paying for it by selling its own currency to keep its value low and prop up the dollar (“push” money in). By letting the Chinese and others keep the value of the dollar artificially high and their currency value low, US exports have been made non-competitive in foreign markets. This has prevented us from exporting our way out of our trade deficit which is the mechanism by which trade imbalances are corrected. Over time this has meant the gutting of US exporting industries and a significant loss of jobs.

Read more Foreign Invasion Sends Markets Reeling.