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Capital, Savings, and Investment, Borrowing from Foreign Savers

wealthiest countries, consumption goods, large engines, foreign nations, flow of funds

The flow of funds from other nations enables U.S. firms to finance more investments in capital goods, but it also creates concerns. For example, in order for foreigners to invest in U.S. savings accounts and U.S. government or corporate bonds, they must have dollars. As they demand dollars for these investments, the price of the dollar in terms of other nations’ currencies rises. When the price of the dollar is rising, people in other countries who want to buy U.S. exports will have to pay more for them. That means they will buy fewer goods and services produced in the United States, which will hurt U.S. export industries. This happened in the early 1980s, when U.S. companies such as Caterpillar, which makes large engines and industrial equipment, saw the sales of their products to their international customers plummet. The higher value of the dollar also makes it cheaper for U.S. citizens to import products from other nations. Imports will rise, leading to a larger deficit (or smaller surplus) in the U.S. balance of trade, the amount of exports compared to imports.

Foreign investment has other effects on the U.S. economy. Eventually the money borrowed must be repaid. How those repayments will affect the U.S. economy will depend on how the borrowed money is invested. If the money borrowed from foreign individuals and companies is put into capital projects that increase levels of output and income in the United States, repayments can be made without any decrease in U.S. living standards. Otherwise, U.S. living standards will decline as goods and services are sent overseas to repay the loans. The concern is that instead of using foreign funds for additional investments in capital goods, today these funds are simply making it possible for U.S. consumers and government agencies to spend more on consumption goods and social services, which will not increase output and living standards.

In the early history of the United States, many U.S. capital projects were financed by people in Britain, France, and other nations that were then the wealthiest countries in the world. These loans helped the fledgling U.S. economy to grow and were paid off without lowering the U.S. standard of living. It is not clear that current U.S. borrowing from foreign nations will turn out as well and will be used to invest in capital projects, now that the United States, with the largest and wealthiest economy in the world, faces a low national savings rate.



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