he said Capital Injections Unspun


The mainstream financial media lately have been littered with stories about “capital injections” and “capital infusions” into American corporations from foreign entities such as “sovereign wealth funds” or SWF, and these are reported as a positive development in the credit crisis. But what does this trend really mean? Here are a few samples.

A Complete Subprime User’s Guide, 2007 Edition: Caroline Baum

… heaping such huge losses on Wall Street that its biggest banks had to look overseas for a capital infusion, is a story that will be told for years to come. Maybe Wall Street memories will be longer than the crisis this time around…

… the Wall Street Journal reported that Merrill Lynch & Co. may receive a cash injection from Singapore, increasing investor appetite for higher-yielding assets funded by loans in Japan…

Merrill Gains on WSJ Report of Temasek Investment

… the world’s biggest brokerage firm may receive a cash infusion of as much as $5 billion from Singapore’s state-owned Temasek Holdings Pte….

… Citigroup, the biggest U.S. bank by assets, said Nov. 27 that Abu Dhabi would invest $7.5 billion in the New York-based company. State-controlled China Investment Corp. is buying an almost 10 percent stake in New York-based Morgan Stanley for $5 billion after the second-biggest U.S. securities firm reported a loss of $9.4 billion from mortgage-related holdings on Dec. 19…

Wall Street Gets $25 Billion in Chinese, Mideast Cash

Wall Street Gets $25 Billion in Chinese, Mideast Cash

… Wall Street is turning to Asian and Middle Eastern governments for $25 billion to prop up balance sheets battered by writedowns from the collapse of the U.S. subprime market.

State-controlled China Investment Corp. is buying an almost 10 percent stake in Morgan Stanley for $5 billion after the second-biggest U.S. securities firm reported a loss today of $9.4 billion from mortgage-related holdings. Citigroup Inc., Zurich- based UBS AG and Bear Stearns Cos. also received sovereign money after bad investments depressed profits…

China’s $200 Billion Fund Feels Pressure to Meet Return Goals

… The sovereign wealth fund … in May invested $3 billion for a 9.4 percent stake in New York-based Blackstone Group LP, manager of the world’s biggest buyout fund … China set up Asia’s biggest state-owned investment company after surging trade surpluses helped push the nation’s currency reserves to a record $1.46 trillion…

AntiSpin: This all reminds me of the George Bailey’s line in It’s A Wonderful Life, “Potter’s not selling, he’s buying.” Folks, these are not capital injections, they’re capital withdrawals. Cash is not capital, it’s a medium of exchange. It is being used here to buy capital. OPEC and BRIC now own part of these firms that they did not own before. Americans now do not own part of these firms that they did before. Capital is passing from American hands to OPEC and BRIC. Not the other way around. Never mind the fact that in many instances these are agencies of sovereign governments acquiring ownership of this capital and that we used to call that communism, but nevertheless any euphemism that spins it as though capital were coming in to America would be enough to make George Orwell blush.

Regardless of whatever value judgment you may put on it, it’s critical to understand what’s really been going on through the thick smoke of misleading and opaque rhetoric. Trade deficits such as the earth-shattering records the US has been ringing up represent a country that consumes more than it produces. It pays for that excess consumption with capital. Other countries send us things we wear out and burn up. We send them dollars. They send the dollars back and we send them our corporations (see also USA Fire Sale: 1st Meeting 2010).

As these dollars come back, economists all over the media crow about the capital coming into the US. On April 26, 2004, Barron’s ran a column by David Ranson doing just that, referring to a wave of foreign cash coming into the US as an “inflow of capital”. It’s the exact opposite. Let’s take the example of a farm family which consumes more than its land produces by selling off a few acres every year. Common sense tells us that the farmer is getting poorer, not richer. By Mr. Ranson’s backward logic, we should focus on the money the farmer receives for his sales of capital and call it an “inflow of capital”, and forget that the real capital is actually moving the other way.

When we net it all out, the United States is exchanging capital for consumer goods. Consumer goods come in, capital goes out. This problem is the result of an emphasis on taxation of production over consumption and the creation of credit in excess of savings. It is not a healthy balance and must be corrected if the United States is to maintain and grow its standard of living.

Keep that in mind next time you hear a happy story about “capital injections.”

See also: USA Fire Sale: 1st Meeting 2010

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