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Funds exit U.S. in investment gap

In a first, foreigners made more on holdings in this country last year than Americans earned on their overseas assets.

March 15, 2007|Joel Havemann | Times Staff Writer

WASHINGTON — For all its travails in the global economy, the United States has always been able to boast that Americans earned more money on foreign investments than foreigners earned here.

No more.

In 2006, foreigners gained $7.3 billion more on their investments here than Americans garnered abroad, according to Commerce Department data released Wednesday. It was the first "investment deficit" since the government began collecting such statistics in 1946.

While some economists say this reflects the attractiveness of the U.S. economy as a place to invest, critics say it indicates a loss of American wealth and control over its finances. Foreigners can easily decide to invest elsewhere, which could put the American economy into a tailspin.

"Our economic security should not be in the hands of China or Saudi Arabia or any other entity because this administration can't control government spending and because they haven't effectively negotiated trade deals around the world," said Sen. Charles E. Schumer (D-N.Y.), a leading critic of President Bush's trade policies.

Thus the investment deficit is a sobering turn of events, detractors say, and one that many analysts predict would grow before it shrinks. As long as the United States continues to run huge trade deficits, the critics said, its foreign trading partners will have revenue to invest.

And to most of the world, the United States seems to be the safest harbor for investors' money. More foreign investment here means more potential profit for foreigners and a mounting flow of wealth exiting the country.

"The remarkable thing is not that our investment flows have turned negative, but that it didn't happen sooner," said David Kelly, chief investment advisor for Putnam Investments in Boston.

For 20 years, Kelly pointed out, the United States has been a debtor nation. Its holdings in the rest of the world have been smaller than the pieces of America that foreigners have owned. But the overall flow of profit still favored the U.S.

By the end of 2005, the last year for which the government has data, Americans held $11.4 trillion worth of foreign assets and $13.6 trillion worth of America was in foreign hands. Yet Americans made $11.3 billion more on foreign investments that year than foreigners made on their U.S. holdings.

"We're getting better rates of return on our foreign investments than they are," said Nigel Gault, U.S. economist for research firm Global Insight.

Foreigners -- particularly foreign governments, and particularly the Chinese government -- tended to invest in safe but low-yielding government bonds. Americans were more likely to buy foreign stocks or even to buy or build factories abroad.

But although Americans earned a record $622 billion on their investments abroad last year, foreigners took in $629.3 billion from their investments here, also a record, the Commerce Department reported Wednesday.

The bottom line: A net $7.3 billion flowed out of the United States to China, Japan and the rest of the world.

The same report showed faint signs of moderation in the U.S. trade position. The so-called current account deficit, which measures not only trade in goods and services but investment profit, hit a record $857 billion, or 6.5% of total American economic output, in 2006.

But the deficit actually tailed off in the final three months of the year to $195.8 billion, or 5.8% of output for the period. Gault predicted a current account deficit this year of "only" $809 billion.

It will take a lot longer, he said, for the flow of profit to turn back in America's favor. As long as the nation runs a trade deficit, it is adding to the funds foreigners can invest in the United States.

Putnam's Kelly said the public, which for two years has used credit cards and home equity loans to spend more than it has earned, would have to start saving.

"As a nation we are not saving enough," he said. "We are living beyond our means, and we'll have to live cheaper. Our problem is not so much government profligacy as consumer overspending. We shouldn't look to Washington for the cause, we should look in the mirror."

joel.havemann@latimes.com

The Associated Press was used in compiling this report.

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