The effect of foreign direct investment has an impact (look at Japanese investment in California real estate in the 70s, the subsequent crash because of the Japanese economy, and the decade it then took to recover), but I'm much more worried about the growing U.S. debt - foreign bail outs might actually be preferable.
The rising U.S. debt raises a couple of really interesting points, one we've been discussing with each other for a while - the national security implications of foreign ownership of U.S. debt.
Currently, US Federal debt is about $9.7 trillion (according to the US National Debt Clock). Debt held by the public is roughly $5 trillion (the rest is held by various government institutions). HOWEVER - that does not include unfunded Social Security, Medicare & Medicaid bills that will come due. Those total approximately $50 trillion.
Note that this number does not include the recent bailouts.
Foreign countries and institutions own about 25% of all U.S. Treasury Securities issued. However, with the fall of the dollar, there is a declining willingness on the part of foreign governments to want to own our debt (China and Japan are the largest owners - together accounting for approximately 45% of foreign-owned debt). But the U.S. Treasury stats indicate that foreigners hold about 44% of the federal debt that is held by the public.
According to the a report issued by the Bank of International Settlements, "Foreign investors in U.S. Dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency. While unlikely, indeed highly improbable for public sector investors, a sudden rush for the exists cannot be ruled out completely." http://www.forbes.com/afxnewslimited...fx5166493.html
The big risk is that foreign holders of Treasuries will no longer accept low interest rates to help fund our debt. What happens if they demand higher rates to hold our debt - or worse - threaten to dump their holdings? Both of these could have profound ramifications on the U.S. economy and the value of the dollar.
It's easy to dismiss the notion of a run on the U.S. government as unthinkable. But the demise of Lehman Brothers, Merrill Lynch, Bear Stearns, Fannie Mae, Freddie Mac and AIG ought to have people rethinking this: because the largest financial institution with a greater debt and increasing level of bad loans on its books is the U.S. Government.
The credit markets are in total turmoil right at the moment, and the cost of borrowing U.S. dollars overnight was pushed to 6.44%, the highest since 2001. The cost of borrowing dollars for three months rose to 3.06%, and the gap between the amount that banks and the U.S. Treasury pay to borrow at three months was the widest since the Octber 1987 stock market crash. U.S. Municipal borrowers delayed at least $3 billion of debt sales today only - yields on benchmark 30-year tax-exempt bonds rose to the highest on record relative to Treasuries.
So what happens when the countries holding our debt begin to use it to leverage U.S. foreign policy? What happens if China says - we're invading Taiwan - butt out, or we dump your debt?
OK - not likely, and there are a lot of reasons it couldn't happen. But what's really scary are that there are more and more reasons it could.