Wednesday, June 04, 2008

Consumer Confidence About Economy Might Be Low, But Foreign Investor Confidence is High

According to data released today by the BEA, foreign investors pumped $276.8 billion into the U.S. economy in 2007 to acquire U.S. businesses ($255 billion) or to establish new U.S. businesses ($22 billion). This investment activity by foreign investors represents a 5X increase since 2002, when FDI was only $54.5 billion (see chart above, click to enlarge).

Certainly some of the increase could be explained by the 17% depreciation of the USD between 2002-2007 (
data here), but that has to be a relatively insignificant factor in the +400% FDI increase.

Bottom Line: Americans might have lost confidence in their economy over the last few years, but foreign investors apparently haven't, and in fact, are increasingly bullish about the U.S. economy and its businesses. Despite subprime mortgage problems, a housing slump, threats of a recession in 2007, and comparisons to the Great Depression, foreigners almost doubled their investments in U.S. businesses in 2007 ($277 billion), compared to 2006 ($165 billion). Consumer confidence might be low, but foreign investor confidence in the U.S. economy is close to an all-time high.

9 Comments:

At 6/04/2008 10:43 AM, Anonymous E. Harokopos said...

The only thing you can do with dollars received from trade with the US is to invest it back in US, unless you want to provoke a trade war.

Hence, trade balance is up and investment in US increases. Cool...

 
At 6/04/2008 4:48 PM, Blogger Celal Birader said...

Your chart stops at 2007. 2008 might be a different story : the Fed has thrown the dollar to the dogs and i think foreign investors are more likely to think twice or more about whether the U.S. assets can deliver attractive returns in the future.

 
At 6/04/2008 10:44 PM, Blogger OBloodyHell said...

> Certainly some of the increase could be explained by the 17% depreciation of the USD between 2002-2007 (data here), but that has to be a relatively insignificant factor in the +400% FDI increase.

>> The only thing you can do with dollars received from trade with the US is to invest it back in US, unless you want to provoke a trade war.

Exactly right. And the funny part is, when they all try to do it at once, they drive prices up, and often wind up not making long-term-profitable purchases... when the Japs did this in the early 90s, they wound up selling a good chunk of the stuff they bought back at a loss. That's part of the reason the Japanese economy (along with neoKeynesian gov't policies) has stayed in the doldrums for the last 15 years.


> 2008 might be a different story : the Fed has thrown the dollar to the dogs and i think foreign investors are more likely to think twice or more about whether the U.S. assets can deliver attractive returns in the future.


Well, I won't attempt to evaluate this argument, but, as I recall, from a couple entries back, the long-term prospects for the US$ were pretty good on the trading market for a year from now. I may be wrong, but this seems to be at odds with your perception, is it not? It strikes me as out of sync.

 
At 6/05/2008 6:57 AM, Blogger Celal Birader said...

the long-term prospects for the US$ were pretty good on the trading market for a year from now. I may be wrong, but this seems to be at odds with your perception, is it not? It strikes me as out of sync.

I too have noticed this.

Perhaps these forward rates are based chiefly on interest rate differentials and future expected interest rate movements between the currencies.

However, there are other fundamentals of the USD which are more difficult to forecast. I still think there is considerable weakness with the USD.

 
At 6/05/2008 8:40 AM, Anonymous E. Harokopos said...

obloodyhell,

What is strange is that Bernanke tried to talk the dollar up the other day by making a very strong statement that led to a USD rally but today Trichet of the ECB talked about rate increases.

I have been tracking those statements by both sides for quite some time. It is clear to me that it is the Europeans who want lower dollar, higher oil and higher food prices.

The reason is simple: EU country budgets cannot finance their huge public sector without the taxes received from oil and food sales.

Also EU cannot finance expansion without higher tax receipts.

EU pushes dollar down to the detriment of worldwide economy using their fiat currency as a bate.

 
At 6/05/2008 9:59 AM, Anonymous E. Harokopos said...

"when the Japs did this in the early 90s, they wound up selling a good chunk of the stuff they bought back at a loss"

Yep, I recall just one case, Madison Square Garden I believe it was, that time I was at university in NY.

The same will happen to Chinese and all other's investments. US will go into a recession this third quarter and those "foreign investors" will scramble out. Americans will buy back 20 cents to the dollar.

This is one reason this whole story about the huge trade deficit is a hoax. Trade deficit means nothing if you have a major reserve currency to play with:

http://www.realclearpolitics.com/articles/2007/01/losing_sleep_over_the_trade_de.html

 
At 6/05/2008 10:01 AM, Anonymous E. Harokopos said...

Here is that link again:

http://www.realclearpolitics.com/articles/2007/01/losing_sleep_over_the_trade_de.html

 
At 6/05/2008 10:03 AM, Anonymous E. Harokopos said...

Well, I cannot get it show all. This is the part after /01/:

losing_sleep_over_the_trade_de.html

 
At 6/09/2008 8:57 PM, Blogger OBloodyHell said...

Good piece. Stossel is a good writer.

 

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