Saturday, June 16, 2012

Offsetting America's Trade Deficit, We've Attracted $7.6T in Net Foreign Investment Since 1990

The Wall Street Journal reported on Friday that:

"Foreigners are stepping up investment in the U.S. after retreating during the depths of the financial crisis, with the latest flurry spurred partly by Europeans seeking havens amid the Continent's debt crisis. The U.S. attracted $28.7 billion in foreign direct investment between January and March, the 12th consecutive quarter of positive flows, the Commerce Department said Thursday.

Foreign direct investment (FDI) includes long-term bets by companies and individuals such as corporate acquisitions and real estate, but not purchases of Treasury bonds and other U.S. securities. Foreign investment in the U.S. last year totaled $234 billion, a 14% jump over $205.8 billion in 2010, with around two-thirds of the cash coming from Europe. Foreign investment in the U.S. has now exceeded its average of the past 10 years in 2010 and 2011, suggesting America's lure for capital has recovered from the crisis.

The pickup in foreign direct investment in the U.S. has boosted stock prices and employment in the manufacturing sector, a cornerstone of the recovery. Overseas investment collapsed in 2009 as economic turmoil froze global capital flows."

Don Boudreaux responds in a Letter to the WSJ:

"Because increased foreign investment in the U.S. requires that foreigners spend a smaller portion of their dollars on buying American exports, a rise in foreign direct investment in the U.S. necessarily increases the U.S. trade deficit (or reduces the U.S. trade surplus).  As your report makes clear, however, such foreign investment is a boon to the U.S. economy and is no drain on jobs here.

Alas, you can be sure that this fact will be ignored the next time – which I guarantee will be soon – some politician or pundit takes to the airwaves to “explain” that America’s trade deficit is a symptom and source of U.S. economic decline or of foreign-government perniciousness (or both)."

MP: As the chart above shows, America's "trade deficit" in every year is always offset by equal dollar amount of "capital inflow" or "foreign investment surplus," such that the overall "Balance of Payments" for the U.S. is always zero.  Last year, there was a $556 billion "trade deficit" on America's "current account" for international transactions involving goods and services, which was exactly offset by a $556 billion surplus on our "capital account" for international transactions involving financial assets, which could also be described as a "foreign investment surplus" for the U.S. 

Of the $556 billion capital inflow to the U.S. last year, $234 billion was for foreign investment directly into acquiring U.S. firms, investing in joint ventures with U.S. firms, or expanding operations of existing U.S.-based operations (e.g. BMW building a new factory in South Carolina).  The other $322 billion was for indirect "portfolio investments" into U.S. stocks, bonds and other securities. 

While most of the media attention focuses on America's "current account deficit" ("trade deficit") for goods and services, a more complete analysis reveals offsetting surpluses for international transactions involving financial assets, which results in a "balance" of our total payments (cash outflows) and receipts (cash inflows) with the rest of the world.   Because international transactions are calculated using double-entry bookkeeping accounting, international payments HAVE TO BALANCE, and the balance of payments has to equal ZERO. 

Since 1990, the cumulative capital inflow from foreigners investing in the U.S. (FDI + indirect portfolio investments) has totaled to $7.6 trillion, which has provided valuable investment capital to the U.S. economy that has financed the  expansion of U.S.-based business, and in the process has boosted U.S. stock prices and supported million of jobs.  But all we ever hear from the media, politicians and pundits is hand-wringing over America's supposed economy-draining "trade deficit," with no recognition of the offsetting, economy-energizing capital inflow.  

60 Comments:

At 6/17/2012 12:10 AM, Blogger PeakTrader said...

Yes, there's a huge amount of capital in the U.S. from foreign capital inflows and capital creation by U.S. firms.

 
At 6/17/2012 12:24 AM, Blogger Benjamin said...

This comment has been removed by the author.

 
At 6/17/2012 12:30 AM, Blogger Benjamin said...

It is interesting to ponder---the USA has an international reserve currency, so we print money and buy goods and services with it, internationally.

The foreigners accept our cash, send us goods or services, and then invest the cash back into the USA (or buy our goods and services).

This transnational model strongly suggests the supply side is global, and practically infinite. Demand-pull inflation is very difficult to accomplish, when goods and services can cross borders easily.

The supply-side is global, and growing rapidly.

In this reality, the USA should print money aggressively. Printing more money makes a lot of sense, in this current context.

Either we get goods and services for free (the foreigners bury our money), or we get more investment in our economy, or we sell more goods and services (as is happening in US manufacturing now, with a lower exchange rate for the dollar).

Hard to see a downside to monetary bullishness.

Inflation is dead---and how can you get inflation in a global economy? If Ford wants to raise prices, in comes Kia, Hyundai, Toyota etc.

The "problem" is too much global supply, of nearly everything. It is a "problem" solved by boosting demand, and that means printing money.

 
At 6/17/2012 2:55 AM, Blogger PeakTrader said...

It seems, over the past four years, the federal government is destroying capital faster than U.S. firms are creating it.

 
At 6/17/2012 7:28 AM, Blogger bart said...

Of the $556 billion capital inflow to the U.S. last year, $234 billion was for foreign investment directly into acquiring U.S. firms, investing in joint ventures with U.S. firms, or expanding operations of existing U.S.-based operations...

It does not appear to be good news from here that US firms are much more owned by foreign sources now than 5, 10 or 20 years ago - much like the increasing percentage of foreign ownership of Treasuries can color political decisions in favor of foreigners.

 
At 6/17/2012 7:47 AM, Blogger Jon Murphy said...

All due respect, Bart, but that is xenophobic paranoia.

I really do mean "all due respect" I always enjoy your posts.

 
At 6/17/2012 7:48 AM, Blogger Jon Murphy said...

If the US economy is shit , no one told outside investors.

 
At 6/17/2012 8:28 AM, Blogger PeakTrader said...

Bart says: "It does not appear to be good news...that US firms are much more owned by foreign sources."

So, for example, when investors don't want to invest in your firm, that's good news?

 
At 6/17/2012 8:31 AM, Blogger PeakTrader said...

If you value your firm at $1 million and a foreigner offers to buy it for $2 million, that's not good news?

 
At 6/17/2012 8:37 AM, Blogger bart said...

All due respect, Bart, but that is xenophobic paranoia.

Does that mean that you don't believe that it does or will create any political effects that are negative to US citizens from the growing Treasury ownership of foreign nations?

Is it ok for foreign governments or companies to own (just an example) 50% or more of US companies and GDP producers? How much is too much?

My point is *not* that "The British (or whomever) are coming! run for your lives!!!..." or similar.



Lastly, if investors are investing in a firm because everywhere else in the world is much worse, I reject that it is good news. Maybe for the US, but the US is located on a planet with other countries and global GDP trends make s difference.

 
At 6/17/2012 8:41 AM, Blogger PeakTrader said...

When the foreigner buys your firm that you value at $1 million for $2 million, you can start another firm.

 
At 6/17/2012 8:42 AM, Blogger Mark J. Perry said...

Is it OK for U.S. companies to own 50% or more of foreign companies and GDP producers? How much is too much?

There is more FDI leaving the country (Americans investing in foreign companies) than coming in (foreigners investing in U.S. companies).

 
At 6/17/2012 8:42 AM, Blogger PeakTrader said...

And foreigners may sell their assets, exchange their currencies for dollars, buy U.S. assets, and move to the U.S. to raise their standards of living.

 
At 6/17/2012 8:46 AM, Blogger bart said...

When the foreigner buys your firm that you value at $1.1 million for $1 million or less and you take it, you're in major trouble.




When the foreigner buys your firm that you value at $1 million for $2 million, then it could easily be worth $3 million... and you need to get a better education, better advisers and better financing etc.

 
At 6/17/2012 8:52 AM, Blogger PeakTrader said...

Why would you sell for less than it's worth, and you know it's not worth $3 million.

 
At 6/17/2012 8:56 AM, Blogger bart said...

bart: Is it OK for U.S. companies to own 50% or more of foreign companies and GDP producers? How much is too much?

Mark Perry: There is more FDI leaving the country (Americans investing in foreign companies) than coming in (foreigners investing in U.S. companies).





That doesn't answer the question.


The reverse question also applies:
Is it OK (and wise for the entire planet) for non U.S. companies to own 50% or more of U.S. companies and GDP producers? How much is too much?

 
At 6/17/2012 8:57 AM, Blogger PeakTrader said...

End of 2010

Foreign-owned assets in the U.S. grew to $22,786.3 billion.

U.S.-owned assets abroad increased to $20,315.4 billion.

Chart of U.S. Net International Investment Position (the difference between the assets we own abroad and our assets that are owned by other countries):

http://news.recruiting.com/wp-content/uploads/2011/06/international-investment.gif

 
At 6/17/2012 8:57 AM, Blogger bart said...

Why would you sell for less than it's worth, and you know it's not worth $3 million.

Are you asserting that it never happens, or that none of my situations don't either?

 
At 6/17/2012 9:05 AM, Blogger Mark J. Perry said...

Is it OK (and wise for the entire planet) for non U.S. companies to own 50% or more of U.S. companies and GDP producers?

Sure, why not? What's the problem if the Chinese were to own 100% of all Chinese restaurants in the U.S.?

How much is too much?

That's a subjective value judgement, and implies that you, or more likely some bureaucrats or politicians, will decide on "how much is too much" and place limits or restrictions on investment flows.

 
At 6/17/2012 9:05 AM, Blogger bart said...

And foreigners may sell their assets, exchange their currencies for dollars, buy U.S. assets, and move to the U.S. to raise their standards of living.

And vice versa.

 
At 6/17/2012 9:06 AM, Blogger Jon Murphy said...

I'm just wondering why foreigners owning shares in companies on American soil is a bad thing.

 
At 6/17/2012 9:11 AM, Blogger bart said...

Foreign-owned assets in the U.S. grew to $22,786.3 billion.

U.S.-owned assets abroad increased to $20,315.4 billion.

Chart of U.S. Net International Investment Position (the difference between the assets we own abroad and our assets that are owned by other countries):

http://news.recruiting.com/wp-content/uploads/2011/06/international-investment.gif



In other words, the US is selling itself bit by bit since about 1997?

 
At 6/17/2012 9:12 AM, Blogger bart said...

I'm just wondering why foreigners owning shares in companies on American soil is a bad thing.

It isn't, in and of itself.

 
At 6/17/2012 9:14 AM, Blogger PeakTrader said...

Bart, yes, and vice versa.

However, a weaker dollar means they can raise their living standards even higher moving to the U.S., because they receive more dollars.

 
At 6/17/2012 9:18 AM, Blogger bart said...

However, a weaker dollar means they can raise their living standards even higher moving to the U.S., because they receive more dollars.

True, if you're expecting a weaker dollar.

But that also doesn't mean that living standards aren't higher in certain other places, nor that their currencies are a bad deal, nor that long term standards of living are trending up in the US like they were in the 50s or 60s.

Value judgment central...

 
At 6/17/2012 9:25 AM, Blogger PeakTrader said...

Bart says: "In other words, the US is selling itself bit by bit since about 1997?"

In other words, foreigners demand U.S. assets more than the U.S. demands foreign assets.

 
At 6/17/2012 9:29 AM, Blogger bart said...

This comment has been removed by the author.

 
At 6/17/2012 9:30 AM, Blogger PeakTrader said...

Many Europeans, Chinese, South Americans, etc. (and Japanese before them) are bailing-out of their countries or diversifying in the U.S..

 
At 6/17/2012 9:33 AM, Blogger bart said...

bart: Is it OK (and wise for the entire planet) for non U.S. companies to own 50% or more of U.S. companies and GDP producers?

Mark Perry: Sure, why not? What's the problem if the Chinese were to own 100% of all Chinese restaurants in the U.S.?

Again, that doesn't address the overall issue. Chinese restaurants don't represent 50% or more of US GDP... although considering many US restaurants, I sure wouldn't mind more Asian places. -g-




bart: How much is too much?

Mark Perry: That's a subjective value judgement, and implies that you, or more likely some bureaucrats or politicians, will decide on "how much is too much" and place limits or restrictions on investment flows.



Yes, of course it's subjective. I reject the implication totally since that's not what I'm driving at either.

This applies, just for one:
"If goods do not cross borders, armies will."
-- Frederic Bastiat


No one effectively said "No!" when no enforced limits were placed on banks... and Glass Steagull was repealed... and the CFTC was not allowed to regulate derivatives.

And I'm completely against the psychopathy of some in DC or Wall St or wherever. Same with greed freaks or power/control freaks or similar.


And the point remains, is it too much for 95% (up from 50% to hopefully clarify my point) of US corporations to be owned by foreigners, or vice versa?
Does anyone even have guidelines or opinions in mind?

At the extreme, I'm referring to monopolies, oligarchies, plutocracies or even fascism.

Surely Dr Perry, you don't agree with so few companies owning the US media -- or do you? (yes, I can play that game too)

 
At 6/17/2012 9:39 AM, Blogger bart said...

In other words, foreigners demand U.S. assets more than the U.S. demands foreign assets.

And how many of those are large corporations or governments, not individuals?

 
At 6/17/2012 9:40 AM, Blogger bart said...

"Fascism should more appropriately be called corporatism because it is the merger of state and corporate power.”
-- Benito Mussolini

 
At 6/17/2012 10:07 AM, Blogger bart said...

Chart of U.S. Net International Investment Position (the difference between the assets we own abroad and our assets that are owned by other countries):

A bit better & more complete one, that only shows the net difference and goes all the way back to 1977 when the series started.

http://www.nowandfutures.com/images/us_net_investment_flow.png

 
At 6/17/2012 1:02 PM, Blogger Buddy R Pacifico said...

"Chart of U.S. Net International Investment Position (the difference between the assets we own abroad and our assets that are owned by other countries):

A bit better & more complete one, that only shows the net difference and goes all the way back to 1977 when the series started.

http://www.nowandfutures.com/images/us_net_investment_flow.png"


I am a bit of dim bulb (duh) on accounting (I hire smart accts), but what is the definition of our assets and their assets?

Bart, you cite the BEA for your chart stats so, where in the BEA can I go for descriptions of the stats that you are depicting, for clarity?

 
At 6/17/2012 1:34 PM, Blogger bart said...

Here's the most recent data source:

http://www.bea.gov/scb/pdf/2011/07%20July/0711_iip.pdf



And a generic google search for the data:

http://www.google.com/search?query=net+international+investment+position+2011+site%3Abea.gov&sa=Google#hl=en&safe=off&sclient=psy-ab&q=net+international+investment+position+site:bea.gov&oq=net+international+investment+position+site:bea.gov&aq=f&aqi=&aql=&gs_l=serp.3...3115.3756.0.4962.5.5.0.0.0.3.369.1349.0j1j3j1.5.0...0.0.qg89KGE-VoU&pbx=1&bav=on.2,or.r_gc.r_pw.r_qf.,cf.osb&fp=5878b6447359618&biw=1043&bih=591

 
At 6/17/2012 4:23 PM, Blogger Buddy R Pacifico said...

"bart said...
Here's the most recent data source:

http://www.bea.gov/scb/pdf/2011/07%20July/0711_iip.pdf"


Bart, thanks, that's exactly what I wanted to see. The chart you made from the BEA stats is quite compelling.

This might bring some bon mots, but the transfer of asset ownership(wealth) over the last couple of decades is confirmed.

 
At 6/17/2012 5:31 PM, Blogger bart said...

Seen one bon mot, seen 'em all? -g-

 
At 6/17/2012 5:35 PM, Blogger PeakTrader said...

"We've Attracted $7.6T in Net Foreign Investment Since 1990.

And we've consumed $7.6 trillion in Net Foreign Goods & Services since 1990.

 
At 6/17/2012 5:43 PM, Blogger PeakTrader said...

Many foreign goods & services were sold too cheaply, to maintain foreign employment, and many dollars were lent too cheaply, to maintain U.S. demand for foreign goods & services.

Also, foreigners had to sell their goods to buy oil priced in dollars on the world market.

 
At 6/17/2012 5:54 PM, Blogger VangelV said...

What is missed in all this hype is the fact that American investment abroad earns much more than foreign investment in the US. Now why would you suppose this is given the fact that there is a lot more investment by foreigners in the US than by Americans abroad?

The answer is simple. The 'investment' is simply a purchase of USTs, not a building of factories and equipment. As such foreign investments simply finance deficit spending and do not produce much in the way of job creation. Now one would argue that this could keep going forever and that foreigners will keep buying USTs for as long as the Treasury is willing to sell them. Frankly, I would not buy such an argument. Eventually the foreigners will demand a higher return and when they do you will either see much higher interest rates or an abandonment of the UST market. Either way the dislocations will be very painful for American investors.

 
At 6/17/2012 6:01 PM, Blogger PeakTrader said...

Moreover, because of diminishing U.S. marginal utility in the 2000s, foreign quantities of goods & services increased faster than prices, for U.S. consumers.

 
At 6/17/2012 6:08 PM, Blogger PeakTrader said...

For example, when your favorite $4 box of cereal goes on sale for $2, you may buy four boxes instead of one, or spend $8 instead of $4.

 
At 6/17/2012 6:09 PM, Blogger PeakTrader said...

It was perfectly rational for the U.S. to overconsume and overborrow in the 2000s.

 
At 6/17/2012 6:22 PM, Blogger VangelV said...


For example, when your favorite $4 box of cereal goes on sale for $2, you may buy four boxes instead of one, or spend $8 instead of $4.


Access to cheaper goods is not a problem for consumers; it is a benefit. But having foreigners recycle what they have earned into US Treasuries so that the government can play global cop and grow welfare programs is a total disaster.

 
At 6/17/2012 6:29 PM, Blogger PeakTrader said...

VangelV, yes, most of the up to $800 billion a year U.S. trade imbalances should've been used for tax cuts and smaller budget deficits, or perhaps budget surpluses. Little of it should've been used for additional federal spending.

 
At 6/18/2012 7:11 PM, Blogger Ron H. said...

Bart: "When the foreigner buys your firm that you value at $1.1 million for $1 million or less and you take it, you're in major trouble.

When the foreigner buys your firm that you value at $1 million for $2 million, then it could easily be worth $3 million... and you need to get a better education, better advisers and better financing etc.
"

Are these fairly common problem?

 
At 6/18/2012 7:14 PM, Blogger Ron H. said...

"Is it OK (and wise for the entire planet) for non U.S. companies to own 50% or more of U.S. companies and GDP producers? How much is too much?"

What possible difference could it make?

I thought Prof Perry's answer was a good one.

 
At 6/18/2012 7:20 PM, Blogger Ron H. said...

Peak: "And foreigners may sell their assets, exchange their currencies for dollars, buy U.S. assets, and move to the U.S. to raise their standards of living."

So, foreigners exchange their foreign assets for US assets, and the owners of the US assets exchange them for foreign assets.

Not sure what your point is.

 
At 6/18/2012 7:22 PM, Blogger Ron H. said...

"Chart of U.S. Net International Investment Position (the difference between the assets we own abroad and our assets that are owned by other countries):"

Who is "we"?

 
At 6/18/2012 7:30 PM, Blogger Ron H. said...

Bart : ""In other words, the US is selling itself bit by bit since about 1997?"

What a quaint notion.

Peak "In other words, foreigners demand U.S. assets more than the U.S. demands foreign assets."

And those on the other side of those transactions agree that it's a good thing.

 
At 6/18/2012 7:36 PM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 6/18/2012 7:51 PM, Blogger Ron H. said...

Peak: ""We've Attracted $7.6T in Net Foreign Investment Since 1990.

And we've consumed $7.6 trillion in Net Foreign Goods & Services since 1990.
"

Yes. the balance of payments must = 0.

 
At 6/18/2012 8:01 PM, Blogger Ron H. said...

Peak: "If you value your firm at $1 million and a foreigner offers to buy it for $2 million, that's not good news?"

No it isn't. It means information is seriously hard to come by, or maybe your firm is the first one to ever be sold to *anyone*.

There may be a market opportunity there for providers of useful information.

 
At 6/18/2012 8:05 PM, Blogger Ron H. said...

Bart: "And how many of those are large corporations or governments, not individuals?"

Do you mean groups of individuals, or supposed representatives acting on behalf of individuals?

 
At 6/18/2012 8:11 PM, Blogger VangelV said...

What a quaint notion.

I think that the real issue is not foreigners investing in American factories or commercial properties but in their purchase of USTs that only finance deficits and allow for military commitments that undermine American taxpayers and future generations. That is the problem that Mark, Don, and others have with their position. As I pointed out, Americans earn much more from their foreign holdings than foreigners do from their American treasuries. That cannot last for very long and eventually we will have one player who decides to leave the party a bit early just to be safe. When that happens the USD could have significant pressures put on it because it is extremely overbought at a time when holders are being worried about all those deficits and all those unfunded liabilities. From what I can see the US is just a few years behind Spain on the way to bankruptcy.

 
At 6/18/2012 8:14 PM, Blogger Ron H. said...

Buddy: "This might bring some bon mots, but the transfer of asset ownership(wealth) over the last couple of decades is confirmed."

Fresh out of bon mots, but every transfer of asset ownership (wealth) requires an equal and opposite transfer of asset ownership (wealth, right). The graph you like indicates a change in form of those assets.

 
At 6/18/2012 8:44 PM, Blogger Ron H. said...

V: "I think that the real issue is not foreigners investing in American factories or commercial properties but in their purchase of USTs that only finance deficits and allow for military commitments that undermine American taxpayers and future generations."

Agreed. And the even realer issue is that those USTs are even available to finance massive US debt.

 
At 6/19/2012 2:15 AM, Blogger Ron H. said...

Bart: "And the point remains, is it too much for 95% (up from 50% to hopefully clarify my point) of US corporations to be owned by foreigners, or vice versa?""

No. Why would that be a problem?

 
At 6/19/2012 7:17 AM, Blogger Mark J. Perry said...

Would it be any different if 95% of the factories in Michigan were owned by companies based in Ohio? Or Canada? Would that scare you?

 
At 6/19/2012 7:36 AM, Blogger VangelV said...

Would it be any different if 95% of the factories in Michigan were owned by companies based in Ohio? Or Canada? Would that scare you?

It makes no difference who owns the factories as long as those factories make good products and create good jobs. The problem is that foreigners have not invested much in factories. The problem is that such investment has been dwarfed by investing in USTs that allow the government to keep growing the welfare/warfare state.

 
At 6/19/2012 9:27 AM, Blogger bart said...

No. Why would that be a problem?


Fair enough, won't debate.

 

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