Capital Market Players: Foreign Investors and Issuers; the Rest of the World
Category Overview
Foreign Investors and Issuers
Major players in the U.S. market
During the 19th century, America was a developing nation, dependent upon the London financial market for capital.
By the 20th century, the U.S. had become the world's greatest industrial power.
After the financial crisis that racked the British Empire in World War I, New York became the international financial capital.
The high point of American Empire came in the two decades following World War II, when, as the major industrial and financial power, Americans spent billions to develop industry in other countries.
The economic policies of the Johnson administration, the lost war in Vietnam, and social change that intensified with Great Society programs, signaled the end of the Golden Years.
The Trade Deficit and Capital Flows
After the U.S. went off the gold standard in 1971, deindustrialization, globalization, and the rise of the dollar as the main international reserve currency created ever-larger trade deficits.
The excess of imports over exports reached almost one billion dollars a day by the end of the century.
These deficits produce dollar deposits in U.S. banks which are primarily invested in fixed income securities, either by the banks or by foreign owners of the deposits.
The trade deficit is a major source of American debt financing, supplying both private and public sectors.
Reduction in the trade deficit or retraction of foreign direct investment would have a serious impact on the American capital market.
Foreign Issuers Offset Domestic Buybacks
Foreign investors are also players in the equity market as direct investors, issuers of foreign stock, and as portfolio investors.
Whereas domestic corporations have been redeeming their own equity since the 1980s, foreign corporations have been using the American capital market as a source of long-term funding for businesses in the rest of the world.
While net equity flows to domestic corporations have been negative for over a decade, foreign direct investment has been strongly positive.
Foreign Debt (in dollars): Not A Problem
Although the U.S. public and private sectors have immense obligations to foreign investors, most of this debt is denominated in dollars, which suggests that a debt-driven currency crisis, such as was seen in Asia and Latin America in the last generation, is unlikely to occur in the U.S.
