This post is by Sharon Nunn from Real Time Economics
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Foreigners poured money into U.S. debt by the largest margin in three years in the fourth quarter, as widening federal budget deficits drive up U.S. demand for foreign funds.
Portfolio investment by foreigners and foreign entities into debt securities like treasury bonds and notes increased by 7.0% in 2017’s fourth quarter from the prior year to $11.6 trillion, the largest jump since the middle of 2014, according to fresh data from the Bureau of Economic Analysis.
“We don’t have enough domestic savings to fund the increasing budget deficit,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. “We need to rely more on foreigners, and that’s why [foreign investment] went up.”
The Trump administration’s tax overhaul passed at the end of 2017 is projected to crimp federal revenues by $1 trillion over the next 10 years and spending is slotted to continue to grow. So U.S. must borrow money to fund the government, but Americans aren’t saving enough to buy the debt in its multiple forms. The saving rate in the U.S. fell to a historic low in 2017.
Foreigners are coughing up the cash, and analysts project they will continue to invest as the U.S. government continues to spend.
“If we’re going to ramp up spending, we’re going to have to fill that gap,” said Oren Klachkin, lead economist at Oxford Economics. “Foreigners will become a larger and larger part of sales.”
Meanwhile, the gap between investments Americans and American entities hold abroad and investments foreigners make in the U.S. grew to $7.8 billion at the end of 2017, with inflows of foreign money eclipsing U.S. investments made outside of the country.
American’s hold $27.6 trillion in foreign assets, including direct investments and securities. Foreigners hold $35.5 trillion in U.S. assets.
Still, a weakening dollar could help shrink the gap, making U.S. investments look cheaper on paper when compared to more expensive foreign investments in places that have strengthening currency, like the euro.