Is the White House Right to Praise Rebounding of Foreign Direct Investment?

According to a report released by the White House Council of Economic Advisers on Monday, foreign direct investment in the United States increased by 49% in 2010.

As reported by Bloomberg, President Obama praised the increase in an e-mailed statement. Obama explained that increased foreign investment should help to accelerate economic recovery in the United States.

Although Obama may be right in his assessment, is increasing foreign demand a sign of too much global liquidity?

Additional inflows of foreign capital may spur business investment. Increased business investment might mean more jobs for unemployed Americans, which could mean more demand and consumption in the U.S. economy.

That all sounds great on an intuitive level, but it might lead to something more sinister.

In 2005, Federal Reserve Chairman Ben Bernanke (before he became the Chairman) gave a speech in which he outlined what he called the “global savings glut.”

Although disputed by other well-know economists, such as John Taylor, the concept of the global savings glut described what Bernanke saw as the present situation: too much savings by certain export-led nations like China, leading to excessive foreign investment in countries like the United States.

That excessive investment might lead to asset bubbles, like the recent one seen in the U.S. housing market. As foreign demand for investments rises, the price of the underlying assets may spiral to unrealistic levels.

Ultimately, that may lead to an economic crash like the one experienced in 2008.

Thus, is the rebounding of foreign direct investment potentially foreshadowing another major bubble in the U.S. economy?

Hopefully not. Yet, asset bubbles have a history of being seen by few. That is, until they pop.

Important Note

Content, including research, tools and securities symbols, is for educational and informational purposes and should not be intended as a recommendation or solicitation to engage in any particular securities transaction or investment strategy. You alone are responsible for evaluating which securities and strategies better suit your financial situation and goals, risk profile, etc. The projections regarding the probability of investment outcomes are hypothetical and not guaranteed for accuracy or completeness. They do not reflect actual investment outcomes and are not guarantees of future results, and do not take into consideration commissions, margin interest and other costs that will impact investment outcomes. Content may be out of date or time-sensitive, and is subject to change or removal without notice. Supporting documentation for any claims made in this post will be supplied upon your email request to editor@zecco.com.

At the time of distribution of the material contained herein, neither Zecco Trading nor Zecco Forex was a market maker or acted as the contra-party for customer transactions through the firm’s principal accounts for the securities discussed.

Zecco Holdings, Zecco Trading, Zecco Forex, and their officers/partners/employees may hold a nominal financial interest in any of the securities discussed herein, with the nature of the interest consisting of, but not limited to, any option, right, warrant, future, long, or short position.

Neither Zecco Trading nor Zecco Forex has participated as a manager or co-manager in public offerings of the securities mentioned herein within the last twelve months.