The recent spate of foreign takeovers of U.S. companies has left some wondering why and whether it represents a sign of economic strength or weakness.

Many government officials and news commentators, including those at the Wall Street Journal, believe that foreign takeovers are evidence of the strength of the U.S. economy. They argue that because the American economy is so robust, foreigners purchase U.S. businesses.

Although there may be a sliver of truth to that argument (the U.S. economy continued to muddle along with a 0.7 percent growth rate in the first quarter of this year), there is another more ominous reason why so many American businesses have become foreign-owned—and it means economic weakness, not strength. The massive wave of foreign takeovers in America reflects evidence of a chronically weak dollar—one that is about to get even weaker.

The dollar is looking precarious. Last week, the euro set a new all-time high against the dollar. It now costs $1.38 to buy a euro. In October 2000, it only cost 83 cents. The pound hit a 26-year peak at $2.0197 on July 2, while the yuan ended July 3 at a record high of 7.5937 yuan to the dollar.

Within the last month, the Australian, New Zealand and Canadian dollars each reached 17-year, 22-year and 30-year highs against the U.S. dollar, respectively.

“The dollar is a basket case,” said Peter Schiff, president of Euro Pacific Capital Inc. “We are going to pay the piper for years of having the underlying fundamentals of our economy disintegrate beneath our feet.”

Part of that price is the flurry of foreign takeovers of domestic industry, infrastructure and property.

During 2006, foreigners spent $147.8 billion snapping up U.S. businesses, up 77 percent from 2005. According to the United States Department of Commerce, Europeans led the way, spending an astounding $109.9 billion—almost twice what they did in 2005. Nationally, Germany, which spent $22.7 billion, was the largest single buyer of U.S. corporations.

Middle Eastern investors, due largely to higher oil profits, spent $12.4 billion purchasing U.S. businesses, more than twice their 2005 levels.

In Asia, Japanese corporations spent $8.7 billion taking over U.S. rivals.

The only notable exception was Chinese corporations, which have not made a major American bid since China’s state-owned oil company cnooc was rebuffed in its attempt to take over California-based unocal in 2005. But that is likely to change. In fact, U.S. dollars from China may be about to flood America, sweeping away American assets in their wake. Both Chinese and U.S. officials have confirmed that this massive wave of liquidity is headed in America’s direction.

In March, the Chinese government announced that it was creating an investment company to make more profitable use of its $1.2 trillion in foreign currency reserves. “We can achieve more profit from the investments,” Chinese Finance Minister Jin Renqing said at a news conference. “We are now preparing the organization of this new corporation.” China has essentially telegraphed to the world that it is about to discontinue purchasing U.S. treasuries, and instead seek higher-yielding investments. In other words, China is about to become a net dollar seller.

This announcement has two major ramifications for America.

The first is that the dollar’s value will continue to fall. Over the past several years, U.S. treasury purchases by China have been one of the main supports for the U.S. dollar. This has been one of the reasons the United States has been able to run such huge trade and budget deficits without experiencing the nasty side effects of high interest rates and a rapidly falling dollar.

Economists believe that about 70 percent of China’s current reserves are in low-yielding U.S. treasuries, so the selling pressure on the dollar has the potential to be large.

What remains to be seen is just how fast and how orderly the dollar falls.

The second ramification pertains to how China intends to part with its dollars. Where will China spend its massive dollar reserves? As the dollar has declined in value against most of the world’s major currencies, China’s dollar holdings have declined in international purchasing power as well. Practically the only currencies that have not risen against the dollar are those that are officially pegged to it, such as some African and Middle Eastern currencies, including Saudi Arabia’s riyal, as well as the Japanese yen.

To get the most bang for its buck, China will probably direct many of its overseas acquisitions toward the U.S. and these dollar-pegging countries.

The economics are compelling. For example: Say China holds one U.S. dollar and decides to purchase Company A in America that is valued at one U.S. dollar, or Company B in Europe which is valued at 0.73 euro (one U.S dollar at current exchange rates). Two months later, as China is about to make a decision to purchase one of the companies, it finds out that the dollar has continued to fall in value against the euro. Now, one U.S. dollar only purchases 0.71 euros. That 2.7 percent exchange rate difference may not seem like much, but on a billion-dollar acquisition, that would make the European corporation $27 million more expensive.

Remember, the dollar has fallen 67 percent (far more than 2.7 percent) against the euro since October 2000.

China has already taken its first steps toward increasing American takeovers. In May, China’s newly created state-investment company agreed to purchase a $3 billion stake in the U.S.-based private-equity Blackstone Group. To quell any potential outcry or resistance from U.S. government regulators (as happened with the failed unocal bid), Beijing has stated that it will not hold voting rights or any influence in the American company.

But will Beijing give up all voting rights on every company it purchases in America?

No matter what some economists say about the benefits of foreign investment in America, there should at least be definite national security concerns when a state-owned, Communist-controlled company purchases American assets. It wasn’t too long ago that China and America were fighting each other in Korea and Vietnam. This first investment in Blackstone is most likely being used as an icebreaker, to allow America to get used to Chinese takeovers.

The Blackstone bid is just the beginning of future Chinese purchases. In mid-June, after meeting with Lou Jiwei, the Chinese official responsible for Beijing’s new investment company, U.S. Deputy Treasury Secretary Robert Kimmitt said he wanted “the Chinese to consider investment opportunities in the U.S.” (wsj, June 20).

“There’s been a very conscious effort [by the government] to make sure that foreign investors understand the welcome mat is still out,” said Todd Malan, president of the Organization for International Investment, an association that represents U.S. subsidiaries of large foreign investors.

To give you an idea of how big the wave of foreign takeovers could become, according to the Daily Reckoning, China’s “$1 trillion on hand … is enough to buy a controlling interest in all 30 of the Dow Jones Industrials” (May 29). That includes Boeing, ExxonMobil, Citigroup, General Electric, Microsoft, JP Morgan Chase, Wal-Mart, General Motors, plus 22 more of America’s biggest and best companies. “A little over 10 years ago, it would have bought the entire Dow, lock, stock and barrel, with change left over” (ibid.).

As America continues to run huge debt and trade deficits, the pressure on the dollar will continue to build. Pressure on foreign nations to dump their dollars will also increase, as will the temptation to spend their rapidly depreciating dollar holdings. Consequently, American assets, whether manufacturing, infrastructure or financial, will continue to be acquisition targets. Expect more big-name American companies to become foreign-owned.

Just last month, for example, Spanish power company Iberdrola bought Energy East, a Maine-based utility supplier, for $4.5 billion in cash. One of Energy East’s subsidiaries provides 80 percent of the power for the state of Maine—talk about a strategic company. In April, Italian energy company Eni bought a chunk of Dominion Resources natural gas fields for $4.8 billion.

In light of just how much American industry and commerce is already owned by foreign firms, the prospect of Chinese state-controlled firms owning key American companies is real. It is, however, a very troublesome trend. The Bible warns of the dangers involved with “the stranger [or foreigner] that is within thee” gaining a financially advantageous position (Deuteronomy 28:43-44).

In times of peace and economic prosperity, foreign control of strategic industries and infrastructure may not be an immediate threat. But during major economic recessions—or, worse, times of geopolitical upheaval and war—the loss of ownership and full control of national industries can be catastrophic.