Despite our policy failures, global capital could end up flowing to the U.S.

by Robert Maynard

The potential that America still has to attract global capital investment from around the world, despite our inept economic policies, brings to mind that well known quote by Sir Winston Churchill: “It has been said that democracy is the worst form of government except all the others that have been tried.”  In other words, despite democracy’s flaws, he saw it has having the advantage of being better than all the other forms of government that have been tried.  Sometimes you do not have to be perfect, or even good, to prevail.  The point is not to be as bad as the potential competition.  Being that least bad option for capital investment is where some financial experts see the U.S. to be during a time of global financial uncertainty.   Such is the conclusion arrived at in this National Review article:

A few weeks ago, it looked like bank depositors in Cyprus might lose 10 percent of their deposits in excess of 100,000 euros. As of this morning, that is looking more like 60 percent. That the European economic-integration project is an unmitigated disaster is obvious to everybody except those who are professionally obligated to remain immune to the truth. But Europe is not the only large economy operating on dodgy premises: While there is no reason to believe that China is headed for a European-style meltdown in the near future, its oligopolistic banking system is rife with bad loans, many of which have been packed into off-balance-sheet instruments, and the country’s bank deposits represent an unusually large share of GDP. Russia has been riding high on a petro boom, but it is one petro bust away from crisis. And if we have learned anything from events such as the 1997 Asian currency crisis or the 2008–09 credit crunch, the sources of economic instability are not always obvious.

Global capital wants to go where there are returns, but it will settle for safety if it has to. For years, that safety was found in the banks of stable, well-governed countries such as Switzerland and the United Kingdom. But the problems suffered in recent years by Iceland and Cyprus, among others, point to a problem for such finance-friendly countries as Ireland, Malta, Singapore, and even Switzerland: Having a banking sector larger than your entire economy can be an enormous problem. (Swiss bank deposits are some six times GDP.)

If you are looking for an economically and politically stable country with reasonable growth prospects in which to park your capital, consider the world’s ten largest economies by GDP, in reverse order: Russia, India, Italy, the United Kingdom, Brazil, France, Germany, Japan, China . . . and the United States, with an economy roughly twice the size of second-place China’s. What else is on the list? A few hostages of the euro nightmare, a couple of autocratic police states overdue for another bloody revolution or three, an up-and-coming democracy in which 68 percent of the people live on less than $2 a day, a poor country not 30 years removed from its last military dictatorship, a rapidly aging country that has been in recession for much of those same 30 years . . . and jolly old England. And us.

The author then explains the pitfalls that can come from bubbles created by unwise investment and goes on to make some recommendations in the way of policy changes to minimize the pitfalls and maximize our global advantage as a destination for capital investment.