For release: Nov. 14, 2003

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Globalization of Financial Markets Creates New Investment Opportunities For U.S., Foreign Investors: St. Louis Fed’s Poole

Link to speech.

Tuscon, Ariz. — Financial market globalization, spurred by advancing technology and liberalization of capital flow restrictions worldwide, has created entirely new investment opportunities for investors in the United States and abroad. These opportunities have led to a rebalancing of portfolios, and the likely possibility that this process is associated with a net export of claims on U.S. assets — a capital account surplus.

William Poole, president of the Federal Reserve Bank of St. Louis, made those points and others today in remarks to the Association for Investment Management Research.

“U.S. financial markets are among the most highly developed in the world, offering efficiency, transparency and liquidity,” said Poole. “Moreover, the U.S. dollar serves as both a medium of exchange and a unit of account in many international transactions. Our advantages include the promise of a good return, safety, secure political institutions, liquidity and an enormous depth of financial expertise.”

Poole said that for some purposes, it’s useful to think of U.S. financial markets as a world financial intermediary. “Just as a bank or mutual fund channels the savings of many individuals toward productive investments, the U.S. financial markets play a similar role for investors around the world.”

According to Poole, another force at work may be a “gradual breakdown in the home bias to investment.” He noted that for some years, there has historically been a home bias in asset portfolios, with investors’ holdings weighted more toward domestic assets than proponents of diversification would recommend. “A balanced international portfolio can help to diversify risk,” said Poole. “The opening of global capital markets has allowed investors to exploit these opportunities, particularly foreign investors who are able to participate in the relative openness of U.S. capital markets and the multinational diversification of U.S. corporations.”

When considering widening external imbalances like those the United States has seen in recent years, said Poole, it’s natural to ask whether those trends are sustainable. “Indeed with a current account deficit equal to 5 percent of GDP and a negative international investment position equal to 25 percent of GDP, some have drawn comparisons with countries like Argentina, Brazil and Mexico at times of severe balance of payments crises,” he said. “I consider it highly unlike that such a crisis will befall the United States. As a stable, diversified
industrial economy, we’re not likely to suffer from a sudden lack of investor confidence.” He noted that among other successful economies, Australia’s debt reached 60 percent of GDP in the mid-1990s, Ireland’s exceeded 70 percent in the 1980s, and New Zealand’s reached nearly 90 percent of GDP in the late 1990s.

“The international capital markets view suggests that the United States is not only more like those countries that have experienced high debt levels without obvious ill effects, but that the U.S. case is, in some sense, unique,” Poole said. “The central role of U.S. financial markets—and of the dollar—in the world economy suggests that capital account surpluses are being driven by foreign demand for U.S. assets rather than by any structural imbalance in the U.S. economy itself.”

Poole said that the United States has created for itself a comparative advantage in capital markets, and “we should not be surprised that investors all over the world come to buy the product.”

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