How does the rest of the world interact with US financial markets?
So I understand that the rest of the world makes payments to US households and firms through the goods market, and the rest of the world can be involved in our stock market, but can US companies and individuals borrow money from the rest of the world through financial markets? And what about vice versa?
In every way imaginable.
Foreign companies and government have bought out U.S. banks
http://www.blanchardonline.com/investing-news-blog/econ.php?article=305
http://www.econlib.org/library/Enc1/ForeignInvestmentintheUnitedStates.html
and have set up their own banks in the U.S. and vice versa (American banks have branches all around the world)
Foreign stocks are available on the U.S. markets through ADRs
http://en.wikipedia.org/wiki/American_Depositary_Receipt
and foreign investment mutual funds, and, now, through E-trade:
http://www.ehow.com/how_6597560_buy-foreign-shares.html
And vice versa (U.S. stocks can appear on foreign stock exchanges the same way)
Corporations (both U.S. and foreign) can issue bonds globally
http://www.businessweek.com/news/2010-09-15/bond-slump-masks-demand-as-yield-spreads-shrink-credit-markets.html
etc.
November 11th, 2010 at 7:23 am
Yes. For companies, that’s generally done by selling bonds. I.e., say GE borrows money by selling new bonds to the bond market. Foreigners can buy those bonds (as well as US government and local municipal bonds).
Individuals can borrow from foreign investors not directly but indirectly. One way, foreigners can buy bonds to capitalize US financial companies that then lend cash to Americans (i.e., foreigners buy Citibank bonds, and Americans borrow money from Citibank using their Citibank MasterCards.) Another way, foreigners can invest in mortgage-backed securities. This provides a pool of capital to wall street firms or to Fannie Mae or Freddie Mac, which then use their capital to buy mortgages from banks that issue the home loans.So, capital is flowing from foreign investors to American home buyers.
And it can all work vice-versa, though mostly it is foreign investors investing in the US for a variety of reasons.
References :
November 11th, 2010 at 8:09 am
In every way imaginable.
Foreign companies and government have bought out U.S. banks
http://www.blanchardonline.com/investing-news-blog/econ.php?article=305
http://www.econlib.org/library/Enc1/ForeignInvestmentintheUnitedStates.html
and have set up their own banks in the U.S. and vice versa (American banks have branches all around the world)
Foreign stocks are available on the U.S. markets through ADRs
http://en.wikipedia.org/wiki/American_Depositary_Receipt
and foreign investment mutual funds, and, now, through E-trade:
http://www.ehow.com/how_6597560_buy-foreign-shares.html
And vice versa (U.S. stocks can appear on foreign stock exchanges the same way)
Corporations (both U.S. and foreign) can issue bonds globally
http://www.businessweek.com/news/2010-09-15/bond-slump-masks-demand-as-yield-spreads-shrink-credit-markets.html
etc.
References :
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