America must live with being a bargain basement

By John Gapper

It is the holiday season in New York City. Thanksgiving is over, the decorations are up on Fifth Avenue and the Christmas tree in Rockefeller Plaza has been lit – this year with energy-efficient light-emitting diodes rather than the traditional lightbulbs. All that remains is for New Yorkers to spend money.

To shop in New York this year, however, is to hear a rich array of European accents. In Bloomingdale’s the other day, two French women were debating the quality of Ralph Lauren towels. As I crossed Avenue of the Americas this week, I heard a British family complaining about the eggs they had for breakfast.

In 1973, Genesis released an album called Selling England by the Pound. It was the time of the oil shock and the album looked back nostalgically over a wealth of English sub-culture. Coincidentally, the Genesis tour of the same name is being recreated in December in New York by the Canadian band The Musical Box, which will perform a multi-media tribute in Tribeca.

These days, with oil approaching $100 a barrel and the Middle East once again overflowing with petrodollars while the US frets over the possibility of recession next year, America is being sold by the dollar.

The shopping surge is due to the weak dollar, which is approaching $1.50 to the euro and is above two dollars to the pound. It is cheaper for Europeans to take a flight to New York for their Christmas shopping than to do it in their own countries.

Rampant European consumption is not confined to Christmas presents. The New York housing market has until recently defied the gloom in other states and carried on rising. But dollar weakness makes New York apartments seem cheap to foreigners: some condominium developers are increasingly relying on foreigners to sustain demand.

The effect is a bit insulting: the “Ugly American” of the 1958 novel, who swaggered around the world with a strong dollar and inviolable set of beliefs, has given way to picky French and shirty Brits. But most New Yorkers see the benefits of foreigners keeping their city buzzing.

Americans are less sanguine about what is happening to US businesses, which are being snapped up by overseas investors as eagerly as luxury items in Saks Fifth Avenue or Bergdorf Goodman.

The investment arm of the Abu Dhabi government this week struck a deal to buy 4.9 per cent of Citigroup, one of the US banks that has been badly hit by the subprime credit crisis. Another Abu Dhabi fund has acquired 8 per cent of AMD, the US chip manufacturer.

Dubai, another of the United Arab Emirates, has been on the prowl for US assets, buying 9.9 per cent of the Och-Ziff hedge fund. Others are looking in the US as well. SK Telecom, the South Korean operator, this week made a joint approach with Providence Equity, a private equity firm, to take a $5bn stake in Sprint, the US mobile operator.

All of this activity has awakened memories of the period in the late 1980s and early 1990s when Japanese investors bought US trophy assets including the Pebble Beach golf course in California. That coincided with US introspection about whether it was being overtaken as a manufacturing power by Japan and by other Asian countries.

Today’s imbalance is less industrial than financial. The US has been running a large trade deficit with the rest of the world, importing manufactured goods from Asia and energy from the Middle East. That has created a savings glut in Asia and boosted sovereign wealth funds set up by states such as Abu Dhabi.

The funds are now flowing back in the form of capital investment. In the past, Arab governments mostly put their petrodollars into Treasury bonds but they are now spreading into equity as well. It is a natural financial rebalancing act but it unnerves some politicians and commentators.

The Wall Street Journal’s editorial page this week recalled that Sheikh Zayed, father of the current ruler of Abu Dhabi, owned the fraud-ridden Bank of Credit and Commerce International in the 1990s. It warned that “Arab interests will now have inordinate sway over America’s largest bank”, since Prince al-Waleed bin Talal of Saudi Arabia already holds a 3.9 per cent stake.

So far, the latest round of stake-building by Arab investment funds has provoked less furore in Washington than the takeover of P&O by Dubai Ports World last year, which led to the Dubai company having to shed its interests in US ports. The political oversight of foreign acquisitions of US companies was tightened as a result.

But what can the US expect if it lives beyond its means in the way it has in recent years? Its consumption patterns and use of energy have turned other countries into its piggy bank. The credit squeeze has left its financial institutions with weakened capital and in need of equity that Arab funds can provide.

If US consumers had saved more, spent less, and filled up their SUVs less frequently – and US financial institutions had not embarked on their own credit binge – they might not be in such an embarrassing condition. But they acted as they did and must live with a weak dollar.

Perhaps those in Washington and elsewhere should adopt the attitude of New York to foreign money. The city might prefer the dollar to be strong but euros, pounds and UAE dirhams are supporting retailers, property prices, and Wall Street. You have to take it where you can get it.