Foreign Investment in U.S. Securities

Foreign capital inflows are playing an important role in the U.S. economy by bridging the gap between domestic supplies of and demand for capital. International capital flows and international capital markets also give the owners of capital the ability to reduce their risk by diversifying their investments. Foreign investors are now major investors in U.S. corporate stocks and bonds and hold some 55 of the publicly-held and -traded U.S. Treasury securities. These capital inflows help keep U.S. interest rates low and allow the Nation to spend beyond its current output, including financing its trade deficit. Some observers are concerned about the extent of these foreign holdings, because they argue that this exposure increases the overall risks to the economy should foreign investors decide to withdraw from U.S. financial markets for political or economic reasons. Congress would find itself embroiled in any such financial crisis through its direct role in conducting fiscal policy and in its indirect role in the conduct of monetary policy through its supervision of the Federal Reserve. But such a coordinated withdrawal seems highly unlikely since the vast majority of the investors are private entities that presumably would find it difficult to coordinate a withdrawal. It is uncertain, though, what types of events could provoke a coordinated withdrawal from U.S. securities markets. Short of a financial crisis, events that cause foreign investors to curtail their purchases of U.S. securities likely would complicate efforts to finance budget deficits in the current environment without such foreign actions having an impact on U.S. interest rates, domestic investment, and the long-term rate of growth. This report analyzes the extent of foreign portfolio investment in the U.S. economy and assesses the economic conditions that are attracting such investment and the impact such investments are having on the economy.