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Investors Fret US Losing Investment Cachet

Javier E. David | Special to CNBC.com
Saturday, 15 Dec 2012 | 8:22 AM ET
Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd.
ChinaFotoPress | Getty Images
Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd.

Imagine a world where the U.S. has lost its mantle as the chief draw for global capital. It's easy if you try.

Investors, politicians and even a growing number of denizens on Main Street are coming to terms with the possibility that a solution to the U.S. "fiscal cliff" may not materialize. Yet other fundamental factors may be at work that could wreak even more long-term economic damage.

Years of loose monetary policy – reinforced this week by the Federal Reserve's decision to expand its easing program – have sent stocks surging and created rock bottom interest rates.

US Not Taking Responsibility For Problems: Expert
Stephen Roach, Senior Fellow at Yale University says problems like the fiscal cliff stalemate in the U.S. speak a lot about the character of the nation. He explains why, and says the U.S. is not accepting responsibility for its self-inflicted problems.

Yet a moribund jobs market, political paralysis, and expanding government regulation has created a vicious cycle where events are conspiring to dim the allure of all major U.S. assets. The uncertainty forces businesses to husband their cash rather than reinvest it in the economy, which makes conditions worse.

All of which leads some observers to believe the wrangling over taxes and spending could have lasting ramifications for the U.S's long standing position as the destination of choice for international capital.

Uneven growth, business stagnation and an increasingly polarized political climate could lead investors to sour irreversibly on the U.S. economy, some argue.

Steven Roach, senior fellow at Yale University and the former non-executive chairman of Morgan Stanley, told CNBC that the U.S. "has gone through a difficult period" since the 2008 financial meltdown.

Still, he faulted the economy's ongoing problems as part of what he called "scapegoating" by ordinary investors, politicians and some on Wall Street.

Current conditions "will force us to take a pretty strong look at the character of a nation," Roach said, with that backdrop making it all the more difficult to solve the U.S.'s long-term budgetary red ink. "There's no silver bullet…we have a polarized country," he said. (Read more: Obama, Boehner Meet on 'Fiscal Cliff'.)

Thus far, Treasury bond investors don't appear concerned about the federal government's ballooning debt. Yields on benchmark 10-year notes and 30-year bonds remain close to historic lows, a measure of the relative safety markets perceive in U.S. government debt.

"If you look at the 10 year treasury, I think it's obvious the rest of the world is still coming to the U.S. to put money," said Starwoods CEO Frits von Paasschen to CNBC this week. "We need to continue to make that happen." (Read more: Rein in Debt or European Crisis Looms: Starwood CEO.)

Doubts, however, are growing about how much forbearance investors will continue to show the U.S. government for its budgetary incontinence.

Government bond yields rose this week in reaction to the Fed's commitment to ultra-accommodative monetary policy, despite the fact that interest rates should have fallen because of the central bank's pledge to stick to its massive bond buying program.

Meanwhile, the euro set a seven-month high against the dollar on Friday, in spite of the euro zone's relentless debt troubles. Although the dollar is seen as a safe-haven in times of distress, the greenback's weakness reflects both expectations of more Fed easing, and the lack of appetite for US assets.


Starwood CEO on Fiscal Cliff Negotiations
Discussing how going over the fiscal cliff might impact the hotel industry, with Frits van Paasschen, Starwood Hotels & Resorts CEO. "In terms of being fixated on tax increases, the proposed tax increases are actually pretty small in the scope of the overall program," he says.

The market's gyrations lent some credence to the idea that the U.S. could be losing its ability to attract investment, even as a safe-haven.

Earlier this week, Goldman Sachs CEO Lloyd Blankfein told the New York Times DealBook conference that one of the biggest risks to the U.S. was its complacency. Because the world's largest economy has never had trouble attracting capital does not mean those conditions will persist indefinitely, he said.

"People are once again complacent about the low level of interest rates," he said. Still, "What's going to happen when growth picks up and interest rates rise? There's going to be a reversal and people will have losses," Blankfein added. (Read more: Investors Face Big Risk Over Interest Rates: Blankfein.)

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