© Gary Hershorn/Corbis

Americans consume more than they produce. Our imports persistently outrun our exports, and the fact that shale oil production and conservation helped reduce U.S. oil imports to the level of the mid-1990s, and falling oil prices cut the oil import bill sharply, will not change this reality.

In recent years, the U.S. current-account deficit averaged around $400 billion a year. Even though this is only half the level of a decade ago, over the past 10 years current-account deficits cumulatively added up to more than $5 trillion.

The greenback was weakening in the early years of the century due to the surfeit of dollars in foreigners’ hands. Its weighted average against other major currencies went down by over 40% from 2000 to 2008. But in the five years since 2011 the dollar index has now gained more than one-third of its value. This means that there has been a substantial flow of foreign capital back to the United States.

Foreign investors buy U.S. financial assets because of faster economic growth in the U.S. and rising interest rates. Last year, foreign holdings of U.S. financial assets reached a record of over $12 trillion. However, Washington also seems to be pursuing a deliberate policy of making itself a global haven for the super-rich. It is the best time in more than a century to be very rich in America — taxes are low and questions about the provenance of international fortunes are few. Not surprisingly, the world’s one-percenters prefer to keep their assets in the United States instead of such traditional havens as Zurich or London.

In the short run, it may be a good idea. But overall, relying on the massive flows of cash whose origins are opaque and often shady may not be prudent. In the long run, it could create a slew of economic and political problems.

Urban Renewal

American cities are flourishing. Urban renewal owes much to recent demographic and cultural trends, such as lower crime rates, young professionals’ preferences for cities over suburbs, and retirement and downsizing by baby boomers. Legal immigration, which accelerated in the 1980s after a hiatus of the 1960s and 1970s, has revived ethnic neighborhoods.

But there is an aspect to the American re-urbanization of the past decade that has not been seen before — at least not to the same extent. America’s largest cities are becoming playgrounds for the super-rich, who now prefer to buy multimillion dollar lofts and condos as their pied-à-terres and as a way to park their money. Increasingly, it’s foreigners who are buying up high-end real estate in American cities — and developers now cater specifically to foreign buyers and investors.

Eight-figure properties are often bought for cash and transactions are executed through anonymous offshore shell companies. Even among known owners there are plenty of crooks and shady characters — and no one has any idea how those who prefer to remain unnamed have made their fortunes. No one cares, either; as long as the money is not related to Islamic terrorism, the U.S. government prefers to turn a blind eye to its provenance.

New York City pioneered this practice under Mayor Mike Bloomberg. Before leaving office at the end of 2013, he famously declared that he would be happy to see every one of his fellow billionaires move to New York. Two years ago, New York magazine published an exposé of real estate practices in the nation’s largest city, calling multimillion dollar digs “stash pads” — after apartments drug pushers rent to store their merchandise. Like drug dealers’ apartments, those condos often sit empty for most of the year.

A year ago, a series of articles appeared in the New York Times detailing how hard it is to identify who are the buyers of top flight New York City apartments. The few that the Times was able to pinpoint made for a nice rogues gallery, whose misdeeds ranged from corruption and malfeasance to tax evasion and suspected links to organized crime.

Penthouse Views

New York remains the preferred American city for foreigners to buy property. The southern end of Central Park has been turned into a billionaires’ ghetto — a theme park for the global one percent where penthouse apartments are going for as much as $100 million. With several of its slim apartment buildings rising more than 1,000 feet — including the 1,775 feet Central Park Tower, which will be the tallest residential building in the world when completed — the neighborhood is starting to look like the Italian hill town of San Gimignano which famously bristles with medieval towers built by its feudal lords.

According to the Times, some $8 billion is spent annually on apartments in the city costing $5 million or more — and this figure is rising. The selling price of the average Manhattan apartment has now reached $1.1 million, an all-time high, pushing above the level seen during the bubble years before 2008.

But New York is certainly not the only place benefitting from foreigners’ largesse. Miami, Los Angeles, San Francisco, Houston and, to a lesser extent, Washington, Chicago, Boston and other cities are also experiencing a major buying spree.

South Florida has been called “ground zero of climate change.” As sea levels continue to rise, large portions of the state risk ending up under water within the next 15–20 years. Yet, the city of Miami is in the midst of a major construction boom, much of it taking place along the shore. As in New York City, the Russians and the Chinese are well-represented here, but it is now mainly the land of Latin American fat cats. And prices are starting to creep up toward New York levels. A penthouse apartment recently went for $60 million.

The U.S. runs an EB-5 visa program, offering residency to wealthy foreigners willing to invest between $500,000 and $1 million in the U.S. economy. Some 10,000 people can take advantage of this program annually and it is typically oversubscribed. It has been criticized for selling green cards too cheaply and not creating as many jobs as it was supposed to. But at least people who get such visas are vetted by Homeland Security. Buyers of U.S. real estate often aren’t.

The money involved wouldn’t seem like a big deal. Foreign direct investment into the U.S. averages around $250 billion annually. Compared to this figure, inflows of foreign money into U.S. real estate is no more than 5%. However, this kind of investment has a substantial multiplier effect as well as additional economic benefits. For example, construction employment increased by some 20% since the low point during the 2008–9 recession. Along with professional and business services, this employment category has been a driving force behind job creation, having added nearly 1 million well-paid, steady blue-collar jobs.

There is more. Downtown Miami, for example, is lined with offices of financial institutions and companies providing all kinds of services to the international super-rich set. They manage money, arrange for legal status, help kids get into U.S. colleges and universities, set up medical treatment if needed, lease boats and planes, etc. This means even more money flowing into the U.S. economy and lots of jobs and tax revenues.

Threat to Stability

It is ironic that Donald Trump, the leading contender for the Republican presidential nomination, got where he is by accusing Mexico of sending its criminals and misfits to the U.S. over the Rio Grande. His own fortune has benefitted by selling apartments to rich foreigners — many of them anonymous and probably unsavory — in New York, Miami and elsewhere.

Traditionally, various international kleptocrats, authoritarian rulers and shady characters have kept their money in Switzerland and flocked to London. But the U.S. government has been putting pressure on Swiss banks to end anonymity and secrecy. The U.S. Treasury has been going after Americans squirreling their money abroad and evading taxes, At the same time, the U.S. seems to welcome with open arms foreign nationals doing exactly the same vis-à-vis their own countries.

Unlike Great Britain, Switzerland and offshore money centers, the U.S. is a dominant economic power whose role is to ensure global economic and political stability. It has done that since the end of World War II — not for altruistic motives but out of self-interest, since America is the prime beneficiary of the international economy.

That is why the damage kleptocrats and criminals inflict on their native countries should be a direct concern to Washington. Capital flight from countries such as China, Russia and Brazil has been massive. In July and August 2015, $300 billion left China, leading to a government crackdown. The Brazilian real and the Russian ruble have been the leaders in depreciation against the dollar over the past two years, losing more than half of their value.

In the past, American officials understood that widespread corruption and thievery destabilizes the global community. Not so any more. Criminal associations consisting of thugs and corrupt government and police officials are becoming international and infiltrate the global financial system. Not surprisingly, the Organized Crime and Corruption Reporting Project, an international NGO, named Russia’s president Vladimir Putin its person of the year, “an award given annually to the person who does the most to enable and promote organized criminal activity.”

While the United States is fighting the old war against funding for Islamic terrorists, its laissez-faire attitude to foreign investment in its own country contributes to this problem. A new major threat is quietly emerging under its nose

Global political instability and economic problems may push even more money into American cities, exacerbating the real estate bubbles that have already inflated in many markets across the country. But eventually this flow will decrease. Oil money has already dried up and the period of easy money is coming to an end. The U.S. Federal Reserve has already started to raise its interest rates.

Overbuilt American urban centers are at risk, and so are developers and their lenders — not to mention ordinary people straining to pay mortgages in overpriced markets.

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