Thursday, January 24, 2008
[IWS] CRS: FOREIGN OWNERSHIP of U.S. FINANCIAL ASSETS: IMPLICATIONS of a WITHDRAWAL [14 January 2008]
IWS Documented News Service
_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
________________________________________________________________________
Congressional Research Service (CRS)
Order Code RL34319
Foreign Ownership of U.S. Financial Assets: Implications of a Withdrawal
January 14, 2008
James K. Jackson, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division
http://assets.opencrs.com/rpts/RL34319_20080114.pdf
[full-text, 18 pages]
Summary
This report provides an overview of the role foreign investment plays in the U.S.
economy and an assessment of possible actions a foreign investor or a group of
foreign investors might choose to take to liquidate their investments in the United
States. Concerns over the potential impact of disinvestment have grown as national
governments have become more active investors and as uncertainty over the risks
associated with securities backed by sub-prime mortgages has increased volatility in
financial markets. Actions taken by foreign investors to liquidate their holdings
could affect the U.S. economy in a number of ways due to the role foreign investment
plays in the United States and due to the current mix of economic policies the United
States has chosen. The impact of any such action on the economy would also depend
on the overall condition and performance of the economy and the financial markets.
If the economy were experiencing a strong rate of economic growth, the impact of
a foreign withdrawal likely would be minimal, especially given the dynamic nature
of credit markets. If a withdrawal occurred when the economy were not experiencing
robust rate of growth or if credit financial markets were under duress, the withdrawal
could have a stronger effect on the economy.
The particular course of action foreign investors might choose to take and the
overall strength and performance of the economy at the time of their actions could
affect the economy in different ways. Congress likely would become involved as a
result of its direct role in making economic policy and its oversight role over the
Federal Reserve. In addition, the actions of foreign investors could complicate
domestic economic policymaking. Foreign investors who decide to liquidate their
holdings of one particular type of investment would normally need to look for other
types of assets to acquire. While there are a multitude of possible strategies foreign
investors could pursue, this analysis assesses the impact of four of the most likely
strategies a single large foreign investor or a group of foreign investors could choose
to employ to reduce or withdraw entirely their holdings of U.S. financial assets:
! A rapid liquidation of U.S. Treasury securities.
! A shift in the make-up of foreign investors' portfolios among
various dollar-denominated assets.
! A rapid shift from dollar-denominated assets to assets denominated
in other currencies.
! A slow shift in the make-up of future accumulations of assets away
from dollar-denominated assets to assets denominated in currencies
other than the dollar.
This report will be updated as events warrant.
Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Foreign Investment in the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Flow of Funds in the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Foreign and Domestic Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . . 6
Foreign Capital and the Value of the Dollar . . . . . . . . . . . . . . . . . . . . . 7
Withdrawal of Foreign Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Sudden Withdrawal from U.S. Treasury Securities . . . . . . . . . . . . . . . 10
Diversify Portfolios Among Dollar-Denominated Assets . . . . . . . . . . 12
Shift Away from Dollar-Denominated Assets . . . . . . . . . . . . . . . . . . . 12
Slow Shift Away from Dollar-Denominated Assets . . . . . . . . . . . . . . 13
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Figures
Figure 1. Foreign Official and Private Capital Inflows into the United States, 1996-2006 . . . . . . 3
Figure 2. Flows of Funds in the U.S. Economy, 1996-2006 . . . . . . . . . . . . . . . . . 5
List of Tables
Table 1. Capital Inflows to the United States, 1996-2006 . . . . . . . . . . . . . . . . . . 4
Table 2. Flow of Funds of the U.S. Economy, 1996-2006 . . . . . . . . . . . . . . . . . . 6
Table 3. Selected Indicators of the Size of the Global Capital Markets, 2006 . . . 8
______________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky
Director, IWS News Bureau
Institute for Workplace Studies
Cornell/ILR School
16 E. 34th Street, 4th Floor
New York, NY 10016
Telephone: (607) 255-2703
Fax: (607) 255-9641
E-mail: smb6@cornell.edu
****************************************
_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
________________________________________________________________________
Congressional Research Service (CRS)
Order Code RL34319
Foreign Ownership of U.S. Financial Assets: Implications of a Withdrawal
January 14, 2008
James K. Jackson, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division
http://assets.opencrs.com/rpts/RL34319_20080114.pdf
[full-text, 18 pages]
Summary
This report provides an overview of the role foreign investment plays in the U.S.
economy and an assessment of possible actions a foreign investor or a group of
foreign investors might choose to take to liquidate their investments in the United
States. Concerns over the potential impact of disinvestment have grown as national
governments have become more active investors and as uncertainty over the risks
associated with securities backed by sub-prime mortgages has increased volatility in
financial markets. Actions taken by foreign investors to liquidate their holdings
could affect the U.S. economy in a number of ways due to the role foreign investment
plays in the United States and due to the current mix of economic policies the United
States has chosen. The impact of any such action on the economy would also depend
on the overall condition and performance of the economy and the financial markets.
If the economy were experiencing a strong rate of economic growth, the impact of
a foreign withdrawal likely would be minimal, especially given the dynamic nature
of credit markets. If a withdrawal occurred when the economy were not experiencing
robust rate of growth or if credit financial markets were under duress, the withdrawal
could have a stronger effect on the economy.
The particular course of action foreign investors might choose to take and the
overall strength and performance of the economy at the time of their actions could
affect the economy in different ways. Congress likely would become involved as a
result of its direct role in making economic policy and its oversight role over the
Federal Reserve. In addition, the actions of foreign investors could complicate
domestic economic policymaking. Foreign investors who decide to liquidate their
holdings of one particular type of investment would normally need to look for other
types of assets to acquire. While there are a multitude of possible strategies foreign
investors could pursue, this analysis assesses the impact of four of the most likely
strategies a single large foreign investor or a group of foreign investors could choose
to employ to reduce or withdraw entirely their holdings of U.S. financial assets:
! A rapid liquidation of U.S. Treasury securities.
! A shift in the make-up of foreign investors' portfolios among
various dollar-denominated assets.
! A rapid shift from dollar-denominated assets to assets denominated
in other currencies.
! A slow shift in the make-up of future accumulations of assets away
from dollar-denominated assets to assets denominated in currencies
other than the dollar.
This report will be updated as events warrant.
Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Foreign Investment in the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Flow of Funds in the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Foreign and Domestic Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . . 6
Foreign Capital and the Value of the Dollar . . . . . . . . . . . . . . . . . . . . . 7
Withdrawal of Foreign Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Sudden Withdrawal from U.S. Treasury Securities . . . . . . . . . . . . . . . 10
Diversify Portfolios Among Dollar-Denominated Assets . . . . . . . . . . 12
Shift Away from Dollar-Denominated Assets . . . . . . . . . . . . . . . . . . . 12
Slow Shift Away from Dollar-Denominated Assets . . . . . . . . . . . . . . 13
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Figures
Figure 1. Foreign Official and Private Capital Inflows into the United States, 1996-2006 . . . . . . 3
Figure 2. Flows of Funds in the U.S. Economy, 1996-2006 . . . . . . . . . . . . . . . . . 5
List of Tables
Table 1. Capital Inflows to the United States, 1996-2006 . . . . . . . . . . . . . . . . . . 4
Table 2. Flow of Funds of the U.S. Economy, 1996-2006 . . . . . . . . . . . . . . . . . . 6
Table 3. Selected Indicators of the Size of the Global Capital Markets, 2006 . . . 8
______________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky
Director, IWS News Bureau
Institute for Workplace Studies
Cornell/ILR School
16 E. 34th Street, 4th Floor
New York, NY 10016
Telephone: (607) 255-2703
Fax: (607) 255-9641
E-mail: smb6@cornell.edu
****************************************
# posted by SBasefsky : 1:14 PM
