Volume 1, Issue 1
Table of Contents

Miscellaneous
• From The Publishers
• Last Look: Syd Farber

Cover Story:
Where’s Everybody Going?
What’s causing some small businesses to pack up and leave? And what should we
be doing to stop them?

Feature Story:
The Excessive Costs of Doing Business in New York
A productive Small Business Day in Albany, but worries still exist for Rockland-ites and other New York based businesses.

Feature Story:
How’d They Do That?
Follow Provident Bank CEO George Strayton’s strategies for success.

DEPARTMENTS:

Economics Roundup
• The Smart Investor
• Money Talk

Business Roundup
• Unlock Your Potential
• Marketing By Design

Retail Round-Up
• Talking Shop
• Odds & Ends

Ask the Expert
• Estate Planning
• Mortgage Advice

Invest in Your Community
• The Bottom Line
• First Annual Non-profit Leadership Summit

Dedicated Section:
Rockland Business Association:

The President’s Desk
A new voice for Rockland County and a new advocate for its hottest issues and concerns.

Pinnacles of Success
RBA’s best honored at the
Third Annual Pinnacle Awards.

RBA Happenings
• Committee and Council Info
• Calendar of Events
• New Members

Money Talk
America for Sale
By Bruce W. Mason

America is being sold, and ownership is changing hands.

The U.S. trade deficit has created massive inflows of dollars and a risky financial dependency upon Asian and OPEC oil capital to fund our ballooning U.S. trade deficit. Never before has so much foreign money been invested. With foreign capital inflows of $3 billion every business day—up from $2 billion in 2003 — the external dependency on capital is without precedent. Foreign central banks and investors are buying everything from U.S. Treasuries, agencies, corporate bonds, equities, and commodities to real estate, as well as purchasing companies outright. These inflows are changing who owns America. In fact, the U.S. is becoming increasingly dependent on foreign sources to support its “twin deficits” (the current account and budget deficits).

The Senate voted 52-48 to raise the national debt ceiling from $8.1 trillion to $9 trillion, a huge figure compared to the U.S. GDP that is slightly above $11 trillion. To visualize the sheer size of this debt, let’s use former President Ronald Reagan’s characterization, when, in 1981 the national debt first hit the $1 trillion mark. He dramatized its “incomprehensible” size as “a stack of $1,000 bills 67 miles high.” Today that stack would be over 549 miles high and climbing.

U.S. Treasury statistics indicate that by the end of 2005, foreign investors held close to 50 percent of the entire federal debt held by the public. Foreigners hold more than $2 trillion today, up from $1 trillion in December 2000.

While we are proud of our role as a world superpower, we are, in truth, also the world's greatest debtor. Like all debtors, we as a nation are consistently living beyond our means.

Foreign investors have been financing 80 percent of the increase in the U.S. budget deficit. Major holders of U.S. debt include Japan ($685 billion), China ($257 billion), the United Kingdom ($234 billion), and anonymous “Caribbean banking centers” ($111 billion) as of the end of 2005.

Debt undermines U.S. sovereignty because the American economy now depends on this investment by foreign governments. While we are proud of our role as a world superpower, we are, in truth, also the world’s greatest debtor. Like all debtors, we as a nation are consistently living beyond our means. This exposes the United States to potential financial or political risk.

Today, the potential exists for policy makers in a few Asian countries to direct a sale of their holdings of U.S. assets and redirect the proceeds to other countries, producing a very hard landing in the U.S. This could include a rapid increase in U.S. interest rates, sharp depreciation of the dollar, a fall in housing values, and a decline in stock market indexes.

Luckily it is in their self-interest for foreigners to hold U.S. debt. To change this setup would be at least as “costly, difficult, and risky” to them as to us. The one thing that these inflows of cash have produced is a “flat yield curve” (an interest rate yield curve showing the same yields for short-maturity and long-maturity bonds). The sheer appetite for U.S. assets, specifically U.S. Treasuries, has kept interest rates fairly low. The global imbalance has served as a mixed economic blessing, with the loss of millions of manufacturing jobs on the one hand. On the other hand, cheap products and low inflation, along with low interest rates, have directly fueled the affordability of home mortgages and the resulting boom in housing values throughout the U.S.

What is the solution? The U.S. must develop a plan to include a mix of initiatives designed to boost saving and cut the federal budget deficit. The future U.S. standard of living will be held substantially in the balance. Robert Rubin, former Treasury Secretary under the Clinton Administration said, “The probabilities are extremely high that if we don’t address these imbalances, then at some point, and it could be years down the road, we’ll pay a very big price.”

In other words, the only way the deficit would start to fall is through a major recession in the U.S. and possibly an abrupt dollar depreciation, almost certainly leading to a sharp rise in interest rates and a decline in the U.S. standard of living as foreign investors demanded higher returns for placing their funds in dollar assets. RBD

Bruce Mason is the Chief Economist at Union State Bank. He has been writing Rockland County Economics articles since 1996.