Foreign Ownership of U.S. Financial Assets: Implications of a Withdrawal

James K. Jackson
Specialist in International Trade and Finance

This report provides an overview of the role foreign investment plays in the U.S. economy and an assessment of possible actions a foreign investor or a group of foreign investors might choose to take to liquidate their investments in the United States. Concerns over the potential impact of disinvestment have grown as national governments have become more active investors in the U.S. economy and as innovation in creating financial instruments has increased volatility in financial markets. Such concerns seem out of step with the experience of the 2008-2009 financial crisis, during which the dollar became the preferred safe haven investment for foreign investors. If some foreign investors were to liquidate their holdings, these actions could affect the U.S. economy in a number of ways due to the role foreign investment plays in the United States and due to the current mix of economic policies the United States has chosen. The impact of any such action on the economy would also depend on the overall condition and performance of the economy and the financial markets. If the economy were experiencing a strong rate of economic growth, the impact of a foreign withdrawal likely would be minimal, especially given the dynamic nature of credit markets. If a withdrawal occurred when the economy were not experiencing a robust rate of growth or if credit financial markets were under duress, the withdrawal could have a stronger effect on the economy. 

The particular course of action foreign investors might choose to take and the overall strength and performance of the economy at the time of their actions could affect the economy in different ways. Congress likely would become involved as a result of its direct role in making economic policy and its oversight role over the Federal Reserve. In addition, the actions of foreign investors could complicate domestic economic policymaking. Foreign investors who decide to liquidate their holdings of one particular type of investment would normally need to look for other types of assets to acquire. While there are a multitude of possible strategies foreign investors could pursue, this analysis assesses the impact of four of the most likely strategies a single large foreign investor or a group of foreign investors could choose to employ to reduce or withdraw entirely their holdings of U.S. financial assets: 

• A rapid liquidation of U.S. Treasury securities. 

• A shift in the make-up of foreign investors' portfolios among various dollardenominated assets. 

• A rapid shift from dollar-denominated assets to assets denominated in other currencies. 

• A slow shift in the make-up of future accumulations of assets away from dollardenominated assets to assets denominated in currencies other than the dollar.


Date of Report: March 9, 2010
Number of Pages: 18
Order Number: RL34319
Price: $19.95

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