How to Fill Treasure Chests with Fool's Gold
China, Germany and rich corporations are foolishly hoarding cash needed to keep the global economy afloat
Globalization makes such money-stashing people and countries richer than others. Of course, all that money has to be recycled in order for the global economy to function. And if the saved money is recycled inefficiently, savers lose some of their ability to make more money.
Foreign investment works only when the investment target grows and its institutions don't mind sharing the up-side with foreign investors. Hence, a surplus country should be able to earn more surplus and then invest it in an economy that's growing rapidly.
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But it's rare for these conditions to be met. And a prolonged imbalance always leads to a financial crisis.
If China wants to continue its trade surplus with the United States and contribute to solving the debt crisis in that country, it must invest its vast savings in ways that help the United States grow. Investing in Treasuries doesn't get there, though, since government spending is just not that efficient.
So where should the money go? I think China should switch to investing in U.S. company stocks if it wants to improve its chance of sustaining an economic relationship with the United States. Money invested in the stock market could then be used by companies to help grow the U.S. economy.
Failing to follow this recommendation would keep the U.S. economy sluggish, and inevitably prompt the Federal Reserve to print more dollars. And when the U.S. government pays back its debt, which it will, investors would get dollars worth significantly less than at investment time.
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