How the Fed's Bond-Buying Stimulus Boosts Emerging MarketsThere isn't a huge amount of imagination going in to economic policy these days. The standard tools -- pumping government money into the private sector and gabbing about the importance of education and science -- aren't cutting the mustard, by which I mean, they aren't getting companies to invest in job-creating projects in this country. Without such investment, the U.S. can't achieve the growth needed to get Americans back to work and justify a rising stock market.

But the Fed's plan to spend $600 billion in cash to buy Treasury securities isn't doing much to get companies to invest here either. And this is just the Fed's latest effort: When QE2 is complete, the central bank will have created $1.7 trillion in liquidity since 2008, money that it hoped companies would use to create jobs in the U.S, according to Bloomberg. Instead, companies are taking cash raised here and investing it in emerging markets -- with a focus on producing commodities to feed China's hunger for them.

Raising Capital in the U.S., Investing Elsewhere

Companies like Dell (DELL), Southern Copper, Cliffs Natural Resources (CLF), and Valmont (VMI) are raising money here and investing in where it will grow fastest, according to Bloomberg. This is consistent with a key finding from my recent book, co-authored with Srini Rangan, Capital Rising: How Global Capital Flows Are Changing Business Systems All Over The World: Capital goes to fast growing markets, and corporate investment goes to build plants and buy companies in emerging markets.

Before the financial crisis, capital was pouring into the U.S. Now, it's flowing out. According to the Commerce Department, U.S. corporations' overseas investment in the first half of 2010 was almost $220 billion greater on an annualized basis than the amount that foreign firms spent in the U.S. on factories and acquisitions. In the first half of 2006, the net flow into the U.S. was about $30 billion.

Bloomberg
provides several examples of this trend:
  • Dell's revenue from Brazil, China, India and Russia was up 52% in August 2010 -- more than twice its 22% overall growth. In early September, Dell raised $1.5 billion in three-, five- and 30-year notes, and it plans to spend $100 billion in China during the next decade. The plans include building a manufacturing and customer-support center in Chengdu (adding 3,000 jobs) and expanding an existing operation in Xiamen (500 new jobs).
  • Southern Copper Corp., a large Phoenix- based copper mining firm owned by Mexico's Grupo Mexico SAB, plans to invest $800 million on projects in such like a new smelter and a more efficient natural-gas furnace. But though it raised $1.5 billion in an April debt offering in the U.S., it will use that money in Mexico and Peru, not the U.S.
  • Cliffs Natural Resources, North America's largest iron-ore producer, will use part of a March 2010 $400 million offering to repay its debt in a Brazilian mining project, in which it holds a 30% stake.
  • Valmont Industries, a maker of light poles and communication towers, used proceeds from an April $300 million 10-year note to help finance its $439 million acquisition of Delta PLC, a London-based competitor. Valmont said its goal was to get access to a "highly complementary businesses to our existing businesses and significantly expand our footprint outside the United States, in fast-growing Asian markets and Australia's strong, resource-driven economy."

Strengthening the U.S.'s Capital Magnet

What's most interesting is that U.S. capital markets are doing a booming global business, but those global companies are investing the money outside the U.S. According to Bloomberg, foreign companies sold $605.9 billion in debt through Nov. 15, 63% more than the $371.8 billion raised in 2007, before the Fed cut the overnight bank-lending rate to near 0%.

For example, Sinochem Group, a Beijing-based petroleum, fertilizer and chemicals producer, sold $2 billion of 10- and 30-year bonds on Nov. 4. And on Nov. 2, Korea National Oil Corp., based south of Seoul, sold $700 million of five-year senior unsecured notes.

In short, the majority of the liquidity being created by the Fed is going to benefit Wall Street -- the world's source for cheap capital. Unfortunately, the U.S. government's gift of cheap capital is not finding its way back into the U.S. In fact, by letting global companies raise capital here and invest it in emerging markets, the U.S. is shooting itself in the foot. All that capital flowing out to emerging markets will create jobs and growth elsewhere, while American workers are left unemployed and sitting on the sidelines. This will expand the economic gap between Wall Street and the rest of America, at the same time as it helps other nations build their infrastructure and become more competitive.

What this country's leaders should be looking for is a way to use our financial resources to help the whole country, rather than simply subsidizing Wall Street. One place to start might be to impose a tax surcharge on companies that raise capital here and invest it outside the U.S. Another might be to invest in developing new technologies here that would boost American economic growth, thus making it more attractive to invest capital here.

I am not sure which of these alternatives is more likely, but I definitely prefer new technology to new taxation.


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