Will China become America’s landlord?

Reading time: 4 – 6 minutes

The rest of the world holds $16.9 trillion in dollar financial assets, and China owns a large, although indeterminate, portion of these assets.

Pudong District, Shanghai, China

Inflation becomes credible

With Nancy Pelosi, Chris Dodd, Barney Frank, and Harry Reid having taken over monetary policy from a weak, inexperienced President Obama and with the Democrat-controlled Congress freely enacting highly inflationary spending programs — holders of dollars across the globe are getting worried, and rightly so.

Forget Geithner and Bernanke — the game is now being controlled by the House of Representives while Obama is at fake “town-hall” meetings, whipping up carefully selected crowds for photo-ops.

The Democrats are moving so rapidly to push their inflationary agenda that it may be too late to save the country when the mid-term elections come around in 2010.

REITs can protect foreign dollar assets

As long as the Bank of China holds dollar financial assets, the US Treasury will be able to keep on selling them bonds to finance the federal deficit — unless spending causes the fiscal deficit to exceed the amounts accumulated over the years by the trade deficit.

There is a way that China and other foreign dollar holders can get out of the “dollar-trap” and save themselves from the ravages of US inflation.

That is to buy inflation-protected, non-financial assets from US residents, such as income-producing, US commercial real estate.

In 2008, the total market value of US equity REITs was $176.2 billion.

REITs represent ownership in tens of thousands of premier office buildings, shopping centers, hospitals, malls, apartment complexes, industrial facilities, and medical complexes across the country.

This includes buildings rented by the FBI and the Department of Homeland Security and most major US corporations.

The total market value of US equity REITs is only about 1% of total dollar financial assets of residents of other countries.

REITs can easily be acquired online, with the click of a mouse. If one wanted to buy US real estate assets secretly, all that is necessary would be to set up dummy corporations in offshore financial centers, and then, using closed corporations throughout the US,  buy control of REITs in tiny pieces, unobserved by regulators. If the SEC couldn’t catch Bernard Madoff, despite repeated warnings, what chance would they have to detect a determined  foreign government from acquiring control of a large share of the US commercial real estate market?

Economic and strategic advantages

The benefits of holding real assets as opposed to cash or other financial assets in times of inflation are obvious.

However, national security may also be involved.

Why should a foreign government waste time trying to crack into computer files, seeking corporate or government secrets, when they can put a janitor in a building they own to plant surveillance devices and break into computers and file cabinets at night?

A foreign intelligence service that owns and manages a building with offices of the US government or a manufacturer of classified technical equipment has a tactical advantage.

Remember the case of the bugged US embassy building in Moscow during the cold war.

Economic warfare from the inside

If China were determined to not only protect the value of its dollar holdings, but also to wage economic warfare that could weaken the United States and remove the US dollar from its role as the world’s reserve currency, a massive move into US non-financial assets might be the way to go.

Not only could  better positioning for espionage be exploited, as suggested, but  after buying major commercial real estate, US rival governments could seek control of defensive contractors or take over other key players in the US economy.

Large scale acquisition of non-financial assets offers certain advantages to foreign governments:

1. Value accumulated  by selling goods to the US can be preserved by conversion from monetary into real assets.
2. Real assets can be acquired that present opportunities for gathering intelligence or for controlling essential elements of the US economy.
3. When monetary assets are converted into real assets, there is less demand  for US Treasury Bonds, forcing the US government to inflate the currency. An inflated dollar would no longer be attractive as the world’s reserve currency. The US role as leader of the free world would be finished.

So, even though individuals may make it through the inflation that the Obama regime is ginning up, the United States may not fare as well.

This is not a prediction, but a possibility.

Someone in the US Congress or other corridor of American power may be aware of this and understand that uncontrolled deficit spending combined with the need of holders of dollar financial assets to protect assets against inflation, may have consequences for the economic and strategic position of the US.

Someone in China may be reading this.