Buy American!

Over the course of this year, China's government will find itself with more than $300 billion in new foreign-currency reserves, mostly dollars, that it will have to park somewhere. That's in addition to more than $1 trillion already in the bank. The oil-exporting countries of the world are in a similar predicament, with a trillion petrodollars looking for a home. Japan's got a trillion bucks lying around too.

This is the flip side of the gargantuan trade deficits ($765 billion last year) that the U.S. is running, the result of high oil prices, Asian manufacturing prowess and our spend-and-borrow mentality. That leaves exporters like China the task of figuring out what to do with all those dollars. It's tougher than it sounds.

Consider what happened the first time the nations of the Persian Gulf found themselves in a dollar gusher, during the oil crises of the 1970s. They handed back much of that money to Western banks, which loaned it out to developing countries that couldn't repay it. Then, in the late 1980s and early 1990s, Japanese firms recycled their dollars by investing in trophy U.S. properties, including Rockefeller Center and the Pebble Beach resort. Both those deals ended in bankruptcy for the acquirers.

This time around, Japan seems content with U.S. Treasury bonds--a dud investment, but a reliable one. China and the gulf states, though, are aiming higher. On May 20, the Chinese government said that it was paying $3 billion for just less than 10% of the Blackstone Group, the U.S.'s leading private-equity firm, which owns everything from Freescale Semiconductor to Michaels Stores. The next day, Saudi Basic Industries Corp. said it was buying General Electric's plastics division--the storied operation based in Pittsfield, Mass., where former GE boss Jack Welch earned his stripes--for $11.6 billion.

The Blackstone transaction makes barely a dent in China's foreign-currency reserves, but it signals that the government wants to invest its dollar stash more aggressively. The deal was nicely timed--just before top Chinese officials arrived in Washington for talks aimed at reducing the bilateral trade deficit. "It's a safe bet. It's politically savvy and economically very smart," says Bank of America market strategist Joseph Quinlan. The Saudi plastics buy, in turn, is part of an effort to move up the economic food chain from pumping oil to making things of value out of it. The day after, the CEO of oil-field-services firm Halliburton practically begged for a similar investment from the gulf.

These deals--unlike recent debacles in which the China National Offshore Oil Corp. failed in an attempt to buy Unocal and Dubai Ports World bought and then had to give up control of several U.S. ports--appear to have profiles low enough to avoid political opposition. Make no mistake, though: foreign investors' presence in the U.S. is only going to grow.

Ever since the late 1970s, America's appetite for foreign oil, cars and consumer electronics has resulted in trade deficits that can be financed only by attracting investment from overseas. Since 1986, the U.S. has been a net debtor--to the tune of $2.7 trillion at the end of 2005.

In one sense, foreigners' buying companies is a good thing for a debtor nation like the U.S., because it's harder to dump those investments in a panic than it is to sell bonds. But there's a worrisome aspect to this trend, even beyond the usual xenophobic concerns about foreigners' acquiring our national treasures.

Until last year, partly as a result of the dollar-investing disasters described earlier and partly because most foreign investors preferred safe but low-yielding bonds, Americans earned more on their investments abroad than foreigners made here. This meant you could argue that our nation's decades-long spending binge had actually left it richer in relation to the rest of the world, not poorer. In 2006, though, the U.S.'s long-running investment-income surplus gave way to a deficit of $7.3 billion.

If that keeps up--and all indications are that it will, especially if China and the gulf states prove to be savvy investors--the U.S. will effectively be sending big checks abroad each year to pay for good times past. Which is money Americans won't be able to spend on oil, cars and consumer electronics.