The Never Ending Foreign Sucker Express
How is that possible? The most blunt and honest answer is that the foreigners who invest in America are suckers who allow themselves to get screwed by the Americans.
To illustrate this point, let's look at their track record. First, their preferred choice of investment was U.S. government bonds. Government bonds have the advantage of at least not losing in value in nominal dollar terms, but because the U.S. dollar is constantly debased in the form of inflation and depreciation they are still losing in value in real terms. As I found when doing research for the paper I told you about a while ago, U.S. government bonds had the by far worst return of any government bonds in advanced countries during the latest 25-year period.
Then they started accumulating Mortgage backed securities in the hope of getting a higher return than from government securities. And well, I think we are all aware of how well that went. And now they are accumulating financial stocks, as we see in the case of Singapore's latest purchase of Merrill Lynch-stocks. Singapore had already bought a large stake in Merrill Lynch in December when the stock was worth more than twice their current value, meaning that the Singaporeans have lost more than half of what they invested then. Presumably, they hope things will turn out better this time.
But unless Merrill Lynch has gotten completely out of the housing market (I haven't studied their balance sheet in detail so correct me if I'm wrong, but I find that unlikely) then things are just going to get worse.
As I pointed out recently, house prices will fall a lot more before this is over. That in turn means that the value of any securities or loans backed by houses will also fall further, meaning that Merrill Lynch will continue to make big losses, losses that will have to be absorbed by the shareholders, including the Singaporeans.