Surplus nations earn their surpluses in US Dollars. By investing their dollar surpluses in US dollar assets, the trading partners of the United States helped fuel the stock market bubble, facilitated the incredible misallocation of corporate capital, and, by acquiring Fannie Mae debt, contributed to the dangerous rise in US property prices. Where did the money go? U.S bond market total $2.5 trillion a $400 billion increase 2001 to 2002, commercial paper $1.32 trillion, mortgage related securities $1.01 trillion, new issues corporate bonds $388.2 billion, Fed agencies long term new issues $453 billion and $659 billion short term, treasury gross coupon issuance $233 billion, and municipal issuance $196 billion. Surplus nations need $500 billion of investment vehicles each year in the financial, corporate, and household sector. At present 40 percent of privately held U.S treasuries is held by foreigners. The risk occurs should the foreign country decide to sell off for political or economic reasons. For this reason it is unlikely the percent will exceed 50 percent. Surplus nations would need look too the private sector to spend $250 billion dollars and the $800 billion U.S budget deficit play a part of a safe dollar denomination asset. Between 2000 and 2002, U.S equities markets lost $8 trillion in market capitalization or 48 percent drop but still maintaining a P/E of 26. Surplus nations are less prone to invest in a market with high P/E ratios seeking a 15 P/E viewing the stock market as overvalued. The remaining major investment is direct investment through purchasing U.S companies and U.S companies must maintain the attraction by keeping their earnings high. A slowing economy will deter foreign investment.[Learn More ...]

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