The current political saga and debate about the purchase by a Dubai-based company of the management of six US ports misses the most crucial point: with a US current account deficit running towards $900b this year and probably above one trillion $ next year, in a matter of a few years foreigners may end up owning most of the U.S. capital stocks: ports, factories, corporations, land, real estate and even our national parks. This is basic accounting: if you run a current account deficit (import more than export, spend more than your income, save less than you invest) you need to borrow from the rest of the world to finance such excess of spending (on private and public consumption and investment) over your national income. And you need to borrow on net every year to the tune of the current account deficit. That is why countries that run current account deficits become net foreign debtors. There are only two ways in which this accumulation of foreign liabilities of a debtor country can occur: either debt (when you issue private or government bonds purchased by foreigners and when you borrow in the form of bank or other loans from foreigners) or equity that can take the forms of FDI (foreign direct investment when non-residents acquire a domestic firm or other domestic assets such as real estate  or when they build a new factory in the US) or portfolio investment in the equity market. So, it is either debt or equity but in either case the foreign liabilities of the US go up and foreigners increase debt or equity claims against the US. It is as simple as that and, with a trillion $ current account deficit the US foreign liabilities will increase every year by a trillion dollars.

Now, until recently, foreigners have financed the US current account deficit more in the form of debt rather than equity. Since a good fraction  of this current account deficit was driven in the 2004-2005 period by the growing US fiscal deficit, the foreigners have piled up more and more Treasury bills and bond. Indeed, by now over 53% of all Treasuries are held by non-residents, a good fraction of which by foreign central banks. But, increasingly, foreigners are starting to realize that exchanging their goods and services for lousy low-return IOUs of the US government is a most lousy deal for them. Why to hold Treasuries that give you a mediocre 4.5% return over 30 years when you can instead buy higher return capital such as US corporation, US factories, ports, real estate and any other asset currently owned by American in this great land of ours?

The nationalistic political backlash against this foreign acquisition of US capital it altogether hypocritical. Foreigners are selling us their high quality goods and services because we are on a national consumption binge and they are getting tired of getting in return useless low-return IOUs of the US government. There are plenty of great assets and gems in the US that are much more worth and provide in the long run much higher returns than T-bills. So, they rationally want to buy those assets, i.e. lend us in the form of equity rather than debt. An these foreigners are, increasingly, not just private investors but also central banks and other public authorities that have accumulated low-return dollar reserves to the tune of almost $400b last year alone with a total stock of such dollar reserves that is close to $3 trillion now. Also, altogether hypocritical is the behavior of US politicians who lobby hard all of the world to open up their markets to US foreign direct investment and now they are screaming, under the fig leaf of national security, about the foreign FDI into the U.S. And a big fig leaf it is as "national security" arguments have always been the first and last refuge of protectionist scoundrels. In France, the attempt by a US company to buy Danone, a yogurt producer, was repelled based on similar national security  - or national pride - arguments; and such French resistance led to rightful mockery and scorn of such French yogurt nationalism. Now, both in the CNOOC-Unocal case and the Dubai-port case, national security scoundrels are hiding behind a flimsy national security argument to stop an altogether legitimate business transaction. Unfortunately, since the US is hollowing out the only goods and services that we are still producing at home are weapons, airplanes, high tech good, oil and other important commodities, financial services and other high tech services. And for each of these goods/services, one could make the argument that they are of some "national security" interest; any of these goods may have in principle military or security implications, even our ports as the current saga suggests. Unfortunately, for a country like the US whose core industrial base is hollowing out these are the goods and services that are up for sale and that foreigners want to buy. So, we may want to get used to it.

Also, the worry about unfriendly regimes is somehow misplaced as, unfortunately, the countries that are now financing the US current account deficit are not our friends and allies but, potentially, our geopolitical rivals or unfriendly states. In the 1980s, the biggest financer of US twin deficit deficits were the U.S. geo-strategic allies: Japan and Europe. Today instead, the biggest financers are of the U.S. twin deficits are China, Russia and Saudi Arabia. China is potentially the most significant strategic rival of the US or, at least, a strategic competitor; Russia is a relatively unstable country that is not a US ally and is becoming increasingly authoritarian; while Saudi Arabia is an authoritarian and unstable regime that has been using a small part of its accumulation of petrodollars to finance Islamic fundamentalism around the world. So, for its own financing the US is effectively captive to the political decisions of potentially unfriendly states, an indeed worrisome "balance of financial terror". The war on terror and the war in Iraq are being financed by China, Russia, Saudi Arabia and a bunch of other unfriendly or unstable countries (Nigeria, Venezuela, Iraq, etc.). And all these countries and their private and public investors, whether friendly or unfriendly, now increasingly want to buy US equities rather than useless bonds. So, a Chinese company recently acquired the PC division of IBM and Chinese companies are already managing parts of US ports. So, whether we like it or not we will, increasingly, sell all of our assets and capital stock to foreigners, whether these foreigners are friendly or unfriendly to US. And since one can expect, at current trends, US current account deficits of at least one trillion dollars a year from next year on, one can forecast that, if an increasing fraction of the inflow of capital into the US will go into equities rather than debt, an increasing fraction of the entire US capital stock will, in a matter of a decade, be owned by non-residents. Not that there is anything wrong with that from the foreigners point of views: they will sell us their goods and services and they will require to be paid not in IOUs but rather real assets and the gems of the US capital stock. It is only a fair trade. And if we do not like that as a nation, maybe we should start taxing the rich, cut our budget deficit and have more public savings as we did in the 1990s; we should consume less, save more and build less homes that are increasingly bubbly. The alternative is clear: if we continue with our current patterns of spending above our incomes, by 2013 the US foreign liabilities could be as high as 75% of GDP and an increasing fraction of such liabilities will be in the form of equity, i.e. foreigners owning our capital, real estate, assets, ports, parks and whatever other national gems we own. It is simply a matter of basic national income accounting: if you spend more than your income, the willingness of your creditors to lend you money will eventually shrink and you will be instead forced to sell them your real assets rather than IOUs and debts on which you may eventually would want to default on. Any smart creditor know he/she needs collateral against its credit claims; and there is no better collateral than taking over directly the assets of the reckless debtor. Caveat Emptor!

So, let us stop whining about the dangers of unfriendly foreigners owning our firms and assets and get used to it. Unless we change our spending habits and stop our reckless fiscal and economic policies that are leading to the hollowing out of the US as a competitive producers of goods and services in the global market, the Chinese will indeed own most of America and its assets.

Yes, China should let its currency appreciate over time as an undervalued RMB is partly behind the loss of US competitiveness. But let us not kid ourselves: our fiscal and external deficits and accumulation of debts have much more to do with  our reckless fiscal policies and a reckless consumption binge that is sustained by a housing asset bubble that will eventually pop than anything to do with what China does. And we should be thankful that China has been willing so far to finance us at low interest rates and thus allowed the reckless deficits of the US government and the US consumer.

But now China and our other creditors want us to sell them our best china rather than useless pieces of paper in exchange for the cheap and high quality goods that they are producing. If we balk and refuse and start using national security arguments to prevent that, they may just tire of financing us and may decide to dump our worthless IOUs; we may thus be better off shutting up and welcome their willingness to, at least buy, US real assets and capital on which they may still suffer severe capital losses once the dollar starts to depreciate against their currency. They are kind enough to still desire dollar assets when such capital losses are all but certain. But even a dumb creditor knows that it is better to suffer a capital loss on a productive assets that may give you a 10%-15% nominal return per year than on a piece of papers that gives you a crammy 4.5% per year for the next 30 years. So much for the U.S. dark matter and mysterious intangible assets; with our policies we are instead digging ourselves in a bigger and bigger black hole of liabilities that will eventually sink us all.