The Quiet Takeover of America’s Financial Institutions

There is only one economy where interest rates and inflation are moving higher — and that is in China. For the sixth time in 2007, China raised interest rates to cool its economy. Interest charged in China for a one-year loan will rise to 7.46%.

While the United States stares down the barrel of deflation, inflation in China’s booming economy is very rapid and real. China’s inflation rate is at its highest level in 11 years, with consumer prices jumping about seven percent in November alone.

Rising interest rates and rising inflation are good things for China – – just as they are good things for any country experiencing such rapid growth. China’s economy is likely the fastest growing in the world, having grown about 10% per annum for at least the past five years.

The U.S. Federal Reserve in busy trying to keep liquidity in our banking system. In an unprecedented move, the Fed just provided $20.0 billion in loans to American banks at a special discounted interest rate to help those banks with their credit problems.

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Morgan Stanley (NYSE/MS) reports its first ever loss — $3.56 billion for the fiscal quarter November 30. The second largest U.S. brokerage house blamed write-downs at its subprime mortgage units for the loss.

Bigger news for Morgan Stanley was the announcement that China Investment, China’s sovereign wealth fund, would buy about 10% of one of the oldest brokerage houses in the United States. I can just see J.P. Morgan rolling over in his grave — he would have never thought this possible. (This is not the first time the Chinese have taken a piece of American business history, which is what I consider Morgan Stanley to be. But if you have over one trillion U.S. dollars like China has, what are you going to do with the money anyway?)

The economies of the world move on, the U.S. nears recession, China is booming. And history changes: Instead of the U.S. taking positions in strategic companies in foreign countries, we have China investing in U.S. “prime” companies. By the time all of this is over (i.e. the pain in the U.S. economy), China will own quite a bit of America.