Mish Shedlock

Back on May 15, I wrote "USA for Sale." Following are two short clips in it from Bloomberg and The Jerusalem Post : "Transurban Group, Australia's second- biggest toll road owner, agreed to buy Virginia's Pocahontas Parkway for $611 million, gaining its first U.S. motorway&

"Dubai International Capital said Sunday it had completed its acquisition of Doncasters Group Ltd., which operates several U.S. manufacturing plants that make parts for U.S. military vehicles and aircraft." You might also recall that China tried to buy Unocal and Dubai tried to buy service contracts for U.S. ports.

Enquiring minds might be wondering, "When does this stop?" The answer is not soon.

Please consider China's foreign reserves. The Shanghai Daily is reporting, "China's Foreign Reserves Mount up Even Higher in June": "China's foreign exchange reserves, the world's largest, increased by a third from a year earlier, to US$941 billion at the end of June, the People's Bank of China said yesterday.

"The Chinese government's currency assets excluding gold increased from US$711 billion in June 2005, according to the Beijing-based central bank.

"Money inflows from the trade surplus and foreign investment are pushing China's foreign reserves higher. Analysts say the government still faces pressure on the value of its currency.

"China's reserves overtook Japan's as the world's largest this year and are set to top US$1 trillion, Moody's Investors Service said last week.

"China's trade surplus tripled, to US$102 billion, last year and reached US$61.5 billion in the first half of 2006. The nation had a US$14.5 billion trade surplus in June, a monthly record." In a related story, CBS News is reporting, "Foreign Companies Buy U.S. Roads, Bridges": "Foreign companies are buying up American highways and bridges built by U.S. taxpayers.

"Roads and bridges built by U.S. taxpayers are starting to be sold off, and so far foreign-owned companies are doing the buying.

"On a single day in June, an Australian-Spanish partnership paid $3.8 billion to lease the Indiana Toll Road. An Australian company bought a 99-year lease on Virginia's Pocahontas Parkway, and Texas officials decided to let a Spanish-American partnership build and run a toll road from Austin to Seguin for 50 years.

"Few people know that the tolls from the U.S. side of the tunnel between Detroit and Windsor, Canada, go to a subsidiary of an Australian company -- which also owns a bridge in Alabama&

"Last year, [Chicago] sold a 99-year lease on the eight-mile Chicago Skyway for $1.83 billion. The buyer was the same consortium that leased the Indiana Toll Road -- Macquarie Infrastructure Group of Sydney, Australia, and Cintra Concesiones de Infraestructuras de Transporte of Madrid, Spain&

"Illinois lawmakers are examining privatizing the Illinois Tollway, New Jersey lawmakers are considering selling 49% of the state's two big toll roads, and a gubernatorial candidate in Ohio wants to sell the turnpike.

"Indiana Gov. Mitch Daniels, who championed his state's toll road deal, now wants investors to build and operate a toll road from Indianapolis to Evansville.

"Patrick Bauer, the Indiana House's Democratic leader, says such deals are taxpayer rip-offs.

"Bauer believes Macquarie-Cintra could make $133 billion over the 75-year life of the Indiana Toll Road lease -- for which Indiana got $3.8 billion.

"In five, maybe 10 years, all that money is gone, and the tolls keep rising and the money keeps flowing into the foreign coffers," Bauer said...

"Texas Gov. Rick Perry's vision [is] to attract more than $80 billion in private funds for roads by 2030&

"Not everyone in Texas buys the idea. Harris County officials recently voted against selling three toll roads. Also, independent gubernatorial candidate Carole Keeton Strayhorn opposes Perry's toll road plan.

"Texas freeways belong to Texans, not foreign companies," she said. The best analysis of the situation comes from Indiana house leader Patrick Bauer: "In five, maybe 10 years, all that money is gone, and the tolls keep rising and the money keeps flowing into the foreign coffers."

Bauer understands the situation perfectly. What most do not understand is that the money to buy our roads and bridges comes from a huge and growing balance of trade problems, as well as overconsumption in the U.S.

Asset Sell-off Questions

1. Is that a sign of strength?
2. Is that a good thing?

I think the first question is easy enough to answer. How can it be? If the current pace continues long enough, foreigners will eventually own 100% of U.S. assets. I fail to see how that can be construed as any sign of strength. Furthermore, we seem to be willing to sell public assets because we have to, rather than because we want to.

Given the current balance of trade deficit, foreigners have more dollars than they know how to dispose of. Ultimately, those dollars will come back to U.S. investments, whether we like it or not. In no way can this be construed as a "sign of strength."

The second question, "Is that a good thing?" is much harder to answer.

Given that governments in general cannot possibly know the correct value of anything, nor can they possibly know how to price for services, one can only conclude it is a good thing for the government to give up control of roads, bridges, and ports to corporations that have a vested interest in maintaining and repairing those assets in a profitable manner. Note too that foreigners have a tendency to buy U.S. assets at market peaks, and thus inflated values. If that is indeed the case once again, it is a good thing we are selling off U.S. assets to foreigners at another peak. Finally, there is every reason to assume that private interests (either foreign or domestic) will be more cost-effective at maintaining those assets than various federal, local, and state governments.

When it comes to Unocal, Congress had no legitimate reason to block that sale.

Oil is fungible. It simply does not matter who controls Unocal. Neither shareholders' nor the United States' interests were served by that congressional blockage.

Yet as we sell off parts of the U.S. piece by piece to foreign companies who will then control the amount of tolls we pay on roads and bridges, perhaps questions will be raised about our weak dollar policy that not only allows, but actually encourages that to happen.

All things considered, the balance of trade deficit is not a sign of strength, as some have suggested. Yet depending on one's outlook, it may or may not be a "good thing" to sell off U.S. assets to foreign corporations to finance that imbalance. Short term, it helps to keep U.S. interest rates low. It also gets building and maintaining toll roads and bridges out of government and into private hands that are likely to do the job better and cheaper. That is unarguably a good thing, especially in light of building bridges to nowhere in Alaska. Ideally, maintenance of toll roads and bridges belongs in the hands of people living in the area, but debtors, especially on large maintenance contracts like roads and bridges, may not have that great a selection of bidders. Nor can debtors dictate terms to creditors. The real crux of the problem is that longer term, you cannot sell off more than you have. As long as we keep overconsuming while underproducing, that long-term problem will only get worse.

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