NCPA - National Center for Policy Analysis


March 9, 2006

Despite record-breaking levels of foreign investment in America for 2005, the United States may face trouble, says the Washington Post. With the federal government's $400 billion budget deficit and the U.S. economy's $600 billion trade deficit, much of the financing for these investments must come from abroad.

The U.S. Treasury recently reported that net foreign purchases of long-term U.S. securities exceeded $1 trillion in 2005 for the first time in history:

  • After accounting for the portion of the budget deficit purchased locally, foreign investors financed 98 percent of the 2004 federal budget deficit and 95 percent of the 2005 federal budget deficit.
  • In 2004 foreign private investors purchased 43 percent and foreign governments bought 57 percent of the $352 billion in net foreign purchases of Treasury bonds and notes. Yet in 2005, foreign private investors purchased 83 percent and foreign governments bought only 17 percent of the $351 billion in Treasury notes and bonds financed abroad.

If the dollar, which depreciated during the 2002-04 period, resumes its decline and if foreign governments maintain the lukewarm demand for Treasury bonds and notes they displayed last year, who will finance America's rising budget deficit? The Post asks, Did the decline of net long-term financial flows into the United States in December signal a falling foreign demand for U.S. long-term securities at the very moment of rising American dependence upon these flows?

Source: Editorial, "Foreign Investment in America," Washington Post, March 6, 2006.


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