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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Earlie who wrote (30864)	8/10/1998 7:02:00 PM
From: cardcounter	Read Replies (2) \| Respond to of 132070

Here's a relevant article by my fave currency commentator. It should hold you over till I come up with some thoughts of my own (assuming I can think on my own). David DeRosa: Repatriation Madness: Enough, Already By David DeRosa Special to TheStreet.com 5/29/98 12:01 PM ET Every few months a story circulates in the market that Japan is going to sell its foreign assets to repatriate funds that are badly needed back home. The logic is that if Japan's economy collapses its investors will liquidate their holdings of U.S. bonds and stocks. So if things get tight in Tokyo, New York will feel the pinch. You hear this all the time -- but to my thinking, it defies common sense. There are two problems with repatriation theory. First, as Japan sinks deeper into recession, its current-account surplus, or the difference between exports and imports, expands. This is because Japan's imports shrivel as its income declines, while its exports grow as the flourishing U.S. economy blooms. This surplus represents potential new net investment dollars that are likely to stay offshore -- they won't enter Japan's financial markets -- because of the dearth of investment opportunities at home. Not only will there be no tsunami of money out of Japan, but the trade gap will create a river of funds that will inevitably flow into the better markets. The second problem with repatriation theory is that it flies in the face of a powerful principle that has played out in every financial crisis that I can recollect: Assets flee economic disaster sites. In some financial crises the assets of the host country have simply disappeared into thin air -- especially when the crisis spawns a breakdown in property rights. The best example is the experience of Kuwait after its 1980 stock-market crash. But in most cases, assets simply move to markets where they can earn acceptable rates of return. Liabilities, on the other hand, stay put. The inability of the system to clear these liabilities through an orderly process of bankruptcy can further impede recovery. But the more important rule is that the assets hot-foot it out. Japan is such an economic disaster site. Doom and gloom is everywhere. Every macroeconomic indicator is pointed south. The government is in a muddle. And there are fuzzy property rights -- witness the plight of the Japanese railway investors who woke up one day to find their government in the process of saddling them with a huge hunk of debt. Nobody knows what mergers and shotgun weddings will be forced on the private sector before the recession recedes. The principle is upheld -- the assets disappear and the debts remain. One potential fly in this ointment is the Japanese government's vast holdings of U.S. Treasury securities. Maybe one day Matsunaga or Sakakibara wakes up and decides to put the screws to Rubin. No help with the yen; too much pressure to use fiscal stimulus; too much interference in general; annoying trade friction. Whatever the source of irritation, such a step would not augur good things for Japan. The markets would read the sale of foreign bond reserves as a sign of imminent collapse by the government -- or at least the economy. The key question would be, what will they do with the money? Put it into the Nikkei? Use it to save the banks? Bail out the real estate sector? That's all throwing good money after bad -- or, in the words of the great Peter Lynch, pulling up the flowers and watering the weeds. I don't think so.