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.
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