>Any Henwoodians out there with data on the importance of foreign money in
>the US stock market today? It seems that relatively low US interest rates
>and inflation are the result of a strong dollar and an important cause of
>the growth of stock mkt prices hence US GDP growth. And that US GDP growth,
>with a strong dollar, increases balance of payments on current account
>deficit. Foreign money inflows seem to keep the dollar relatively strong.
>But given that the "flight to quality" has subsided, i.e., that risk
>premiums around the world tend to be converging, why would foreigners (or
>US money abroad) come to the US in such quantities given relatively low
>interst rates? Because the foreign money is going into the stock market,
>which keeps the market up and stimulates higher levels of both consumption
>and investment in the US?
Foreign stock purchases aren't that important - it's foreign inflows into the credit markets, mainly foreign purchases of U.S. Treasury bonds, where all the action is. This table shows the net purchases and net holdings of U.S. stocks by foreign owners ("rest of world" sector, in flow of funds language). [It's from the foreign perspective, so a negative sign means a decrease in foreign holdings (flow) or a net negative position (level).] In fact, foreigners were once large net holders of U.S. stocks, since most foreign investors were more internationally diversified than U.S. holders until the 1980s. Then there was a great outflow of funds as U.S. holders snapped up foreign issues, and eroding the foreign sector's net credit position. There were large outflows in the fourth quarter of last year, as U.S. holders bought at a record-breaking pace (nearly ten times the previous record).
The third column shows the important buyers - nonfinancial corporations, who've been buying up each other and their own stock at a fantastic pace since 1981.
----------------------------------------------------------------------------- PURCHASE (flows) AND HOLDINGS (levels) OF U.S. STOCKS rest of world and nonfinancial corporations percent of GDP, 1952-1998
net position,
rest of world non-
---------------- financial
flows levels corps
1950s 0.07% 0.87% 0.18%
1960s -0.09% 1.42% 0.16%
1970s 0.07% 1.58% 0.43%
1980s 0.07% 1.96% -1.19%
1990s -0.43% -1.00% -0.77%
1980 0.07% 1.43% 0.37%
1981 0.15% 1.89% -0.43%
1982 0.07% 1.87% 0.06%
1983 0.04% 2.13% 0.57%
1984 -0.11% 2.11% -2.02%
1985 0.02% 1.96% -2.02%
1986 0.38% 2.36% -1.92%
1987 0.37% 2.51% -1.61%
1988 -0.08% 1.81% -2.56%
1989 -0.15% 1.52% -2.28%
1990 -0.41% 1.08% -1.10%
1991 -0.34% 0.57% 0.31%
1992 -0.61% 0.07% 0.43%
1993 -0.65% -0.68% 0.32%
1994 -0.68% -2.79% -0.65%
1995 -0.47% -2.48% -0.80%
1996 -0.64% -2.44% -0.84%
1997 0.28% -1.79% -1.41%
1998 -0.40% -0.58% -3.19%
source: flow of funds accounts -----------------------------------------------------------------------------
The flow of foreign capital into the U.S. credit markets has been enormous, and little noticed compared to the 1980s.
As of the end of 1998, foreign financial claims on the U.S. were $5.4 trillion, while U.S. claims on foreigners were $2.7 trillion, for a net balance of -$2.7 trillion. That's deteriorated by about $1 trillion since 1996. About half of that has gone into Treasury bonds, and a quarter into corporate bonds. This gusher of foreign money has kept the real and the financial circulations circulating wildly.
Doug