Tuesday, June 21, 2011

Foreign Direct Investment is good for US. The Trade Deficit is bad for the US. How did my two-sided coin just become one-sided?

Foreign Investment in U.S. Jumped 49% in 2010 From 2009

Despite a world struggling through an economic crisis, direct foreign investment in the U.S. jumped $75 billion in 2010, the White House said Monday.

“The United States remains the No. 1 destination for foreign investment in the entire world,” said the chairman of U.S. President Barack Obama‘s Council of Economic Advisers, Austan Goolsbee. In times of crisis, he said, the U.S. is the “safest harbor.”

Direct foreign investment in the U.S. jumped 49% to $228 billion from $153 billion in 2009. Goolsbee said these investments support 5.7 million workers in the U.S.

President Obama, in a statement, hailed the important role of foreign investments in the U.S. He said the country’s openness to foreign investors helps explain the boost. He said the U.S. has the “world’s most productive workforce,” a culture of innovation, remarkable colleges, and a business environment marked by transparency and the rule of law.

If this is good news, then why is this NOT:

Source: Calculated Risk
The BLUE line represents the US trade deficit with the rest of the world.  It is negative because on a consistent basis we buy more stuff from the rest of the world than they buy from us.  On net, after imports are subtracted from exports, we get "stuff" and they get dollars. What do they do with those dollars? They can buy some of our goods/services. They can buy US financial assets (stocks, corporate bonds, government debt/bonds, mortgages, etc). They can buy US physical assets (buildings and such) or invest in building new physical assets in the US (Honda or Mercedes building a auto manufacturing plant). 

A dollar spent on imported goods/services does not disappear.  Unless lost or hoarded, those dollars we exchange with foreigners MUST make their way back to the US at SOME TIME in the future, right?  Otherwise, they are relatively worthless to the holder. 

So, I guess as the Administration (Dem or Rep) is touting the good news of increased Foreign Direct Investment in the US, it SHOULD show as much enthusiasm for the trade deficit. But it does not seem to work that way.  I guess if you believe there is such a thing as a one-sided coin, then I suppose it is possible.

To learn more about this concept of the "Balance of Payments", I encourage you to go to Welkerswikinomics. A much more detailed explanation from a REAL economics teacher...
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