Reading time: 2 – 3 minutes
Federal Reserve flow of funds table F.107 (Rest of the World) showed that foreign investors — that for many years had been the primary support of US bond and commercial paper markets — were conspicuously absent.
Foreign flows down 99.2%
Foreign investment dries up
In 2006 and 2007, the net annual flows of foreign investment into US financial assets were $1,831 billion and $1,685 billion, respectively.
In Q1 2009, these flows, on an annual basis, had fallen to only $14.4 billion — down 99.2% from the 2006 levels.
These foreign investments, largely the result of the continuing US trade deficit with the rest of the world, have been the essential element in financing US government fiscal deficits, residential mortgages, commercial paper (credit cards, auto loans, etc), and corporate bonds.
Foreign holdings still at all time high
However, despite the retraction in Q1 2009, foreign investment in US financial assets is actually at an all time high. Foreigners simply can not get rid of their massive holdings of US financial assets over night.
Federal Reserve flow of funds table L.102 (Rest of the World), shows foreign investment in US financial assets as $16.8 trillion in Q1 2009, compared to $16.0 trillion in 2007 and ‘only’ $7.7 trillion in 2002.
Worse days ahead?
The trend indicated by flow of funds table F.107 is a movement from financial securities and bank deposits into direct investments and “miscellaneous assets”, such as real estate.
This is a logical reaction to the profligate financial behavior of the Pelosi-Reed Congress and the Obama administration.
World doubts Obama’s ’spending is stimulus’
Inflation is now widely feared and financial assets like bonds and commercial paper do not offer protection.
As the Obama administration moves forward into even greater deficit spending with its trillion dollar health plan, it would be reasonable to expect foreigners to continue to move away from conventional financial assets, seeking safer havens.
This will drive interest rates upwards and bond prices down, making economic recovery more difficult.
Corporations that continue to borrow to support stock buybacks will eventually pay the price — or at least, shareholders will.
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Firstly, my congratulations on a thoroughly entertaining and useful website you have created. Well done!
I have a simple question that almost causes a little embarrassment. It is simply with regards to the article “foreigners shun US assets in Q1″.
In the Sep 2009 flow of funds report, would you find the data of the flow of financial assets by foreigners on the line item “acquisition of financial assets” in F.107 Rest of the World. These numbers are close to the ones that are quoted in the above mentioned article for 2006 and 2007. I would like to understand how much US assets foreigners are buying and where I can get this data.
May I ask what is the difference between the above mentioned line item and “net financial investment”? The numbers are very different and it is not clear to me what different things they represent.
I understand you must be very busy. When convenient for you I would deeply appreciate hearing your knowledgable feedback.
Kind regards,
Alex
Hi Alex,
Thanks for the kind words.
The Fed publishes two flow of funds tables regarding “Rest of the World” investment in the United States: Table F.107 (flows) and Table L.107 (levels).
These figures are revised from time to time, so what appears in, say, data for 2007 may subsequently be revised in future flow of funds releases.
The “level” table shows the total amount of investment or liability with respect to the “Rest of the World”.
The “flows” table shows the difference between level tables for each item from one period to the next. However, flow data is usually “annualized” and otherwise adjusted. For example, differences in levels between two quarters might multiplied by four to present an “annualized” value.
Because of these periodic restatements and readjustments, it is not always easy to reconcile figures that may have been derived from different Z.1 Releases.
The definitions for the different line items can be found on the Fed website here: http://www.federalreserve.gov/releases/z1/fofguide.pdf
For greater detail, you can order the Flow of Fund Guide from the Fed for $20.
The Fed flow accounts only show balances (levels) or flows (differences between levels). They do not show actual transaction volumes. For example, if in a particular period, foreigners had bought $10 billion in equities and sold $10 billion in equities, the flow figure would be zero — the same as if they had bought $100 billion and sold $100 billion.
If you want to know how much of a particular type of financial asset is held by foreigners (or any other group), go the the asset-type level table and see how much is held by each sector (households, rest of the world, etc).
There is more information on reading and interpreting flow of funds accounts in the tutorials on this site: http://capital-flow-analysis.com/investment-resources/tutorials.html
Regards,