A correspondent on the LRC blog refers to the
“....ominous growth in dollar denominated debt instruments held by foreign central banks and foreign investors ...the impact...when foreigners finally decide to shift their massive dollar holdings from...monetary debt instruments to goods of a non-monetary nature. When this process begins...[it] would provide...an additional education in economic reality.”
This belief that vast quantities of US dollars are held by foreigners, & that this will duly lead to disaster, is so widely held in the US, that actual figures are never cited. It is therefore worth having a look at the numbers themselves, in the US balance-of-payments. The US capital account has been in net deficit since 1983. That is, foreigners have been sending more capital into the US than Americans have been sending out. US govt debt sold to foreign central banks & private buyers, & investments in the US by foreigners, are all included in this part of the balance-of-payments. For the 22 years 1983–2004 inclusive, we find the following:- As a proportion of all foreign capital coming into the US:
- Private portfolio investment (i.e., purchase of stocks & shares by foreigners)...31.4%
- Private FDI [Foreign Direct Investment], i.e., purchase/construction of factories, purchase of machinery etc for such factories....18.0%
- Other private investment (loans to companies, private purchase of shares, etc.)...10.2%
- Private bank deposits & holdings...14.6%
- Foreign official holdings of Federal US govt debt...13.8%
- Private holdings of Federal US govt debt...8.7%
In short: For the years 1983 – 2004:-
(a) private foreign investors overwhelmingly invested directly in factories, machinery, etc.; in other business investments; & in American stocks & shares. These add up to some 60% of total capital inflows for those 22 years. In other words, foreigners already own large quantities of ‘goods of a non-monetary nature’. Indeed, it was precisely to buy such goods that they invested their savings in the US.
(b) Another 14.6% of private foreign investment consists of holdings of bank deposits, etc. — mostly held for financial purposes, or as financial investments. That is: Only the smaller part of foreigners’ holdings are financial, & even these are held for investment or business purposes.
(c) Sales of Federal govt debt to private holders came to less than 9% of the total. And these too are held as investments; there are large movements in & out.
(d ) Sales of Federal govt debt to central banks & other official bodies came to less than 14% of the whole. These sales also fluctuated considerably over these 22 years. Central banks hold US$ as part of their foreign exchange reserves. These banks may well exchange some of these holdings for other currencies, but they are unlikely to sell the lot.
The overall conclusion: the sky is not falling. Foreign private investors have continued to invest in the US as they have been doing since the late 19th century. Since 1983, they have chosen to invest much more of their savings in the US stock market, i.e., they have both increased & diversified their investments. More than three-quarters of all capital flows into the US from 1983 to 2004, have been private investments in the private sector.
