	Overview

Foreign capital inflows are playing an important role in the economy. Indeed, during the 2008-2009 financial crises, dollar-denominated assets were the preferred safe haven investment of foreign investors. Over the past decade, the United States experienced a decline in its rate of saving and an increase in the rate of domestic investment. Disruptions in this role have important implications for the United States and for the smooth functioning of the international financial system. Withdrawal of Foreign Investment

This section analyzes four possible strategies a single large foreign investor or a group of foreign investors could employ to reduce or withdraw entirely their holdings of financial assets in the United States. These strategies include
a rapid liquidation of U.S. Treasury securities, a shift in the makeup of foreign investors' portfolios among various dollar-denominated assets, a rapid shift from dollar-denominated assets to assets denominated in other currencies, and a slow shift in the makeup of future accumulations of assets away from dollar-denominated assets to assets denominated in currencies other than the dollar. Given the dynamic nature of finance and credit markets and the instantaneous communication of information, such actions likely would occur within a very short time frame. The overall performance of the U.S. economy at the time of any attempted withdrawal would also influence the economic effect of the withdrawal. For instance, if the U.S. economy were experiencing a robust rate of economic growth, the impact of a withdrawal by foreign investors likely would be minimal, both in the short run and in the long run. However, if such a withdrawal were to occur at a time when the U.S. economy were not experiencing a robust rate of economic growth, or if the U.S. credit and financial markets were under duress, such a withdrawal may well have a more pervasive effect by undermining investors' confidence in the stability and performance of the markets and could result in higher interest rates and a lower exchange value of the dollar over the short run and prolong the adjustment process. If some foreign investors attempted to accomplish such a readjustment in their portfolios quickly by liquidating a portion of their holdings of corporate stocks and bonds and of Treasury securities, the prices of those assets would fall, given the current pervasive role foreign investors play in most U.S. financial markets. As a result of these losses, it seems unlikely that a foreign investor with large holdings or a group of foreign investors would attempt to liquidate their securities quickly. Such willingness on the part of the Federal Reserve to intervene in the financial markets to ensure stability likely makes a prolonged financial crisis arising from a liquidation of financial assets by one foreign investor or a group of foreign investors unlikely, even if those investors are foreign governments.
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 was not experiencing a robust rate of growth or if credit financial markets were under duress, the withdrawal could have a stronger effect on economic activity.
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 makeup of foreign investors' portfolios among various dollar-denominated assets. A rapid shift from dollar-denominated assets to assets denominated in other currencies. A slow shift in the makeup of future accumulations of assets away from dollar-denominated assets to assets denominated in currencies other than the dollar.