Foreign Ownership of US Treasury Securities Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Problem Statement

This case describes the meeting that was held between the Treasury Borrowing Advisory Committee and the assistant secretary of the US Department of the Treasury. The motive of this meeting was to discuss with the committee the debt management issues and the strength of the US economy based on the increased foreign ownership of the treasury securities and to analyze the dependency of the US on foreign loans.

Analysis

The term foreign ownership is basically defined as the majority of the complete control of the ownership in a resource or a business in a foreign entity by those investors who are not citizens of that country. The detailed analysis below has been performed by first analyzing the effect of the increased appetite of the foreign investors on the US interest rates and then the considerable upside and downside of increased foreign ownership have been examined from the perspective of the range of the market participants.

Impact on interest rates in US due to Strong Appetite of Foreigner Investors

The purchase of the treasury yields and other forms of US debt has spurred in size over the past decade and unprecedented levels have been reached by the foreign investors. As a result of this, it has become one of the most important tools for the central bank policies. A strong appetite of the US foreigner investors would have many significant impacts on the interest rates in US. The US economy would be stimulated through the increase in the foreign debt investors in US and the long term interest rates would decline significantly by the asset purchase programs initiated by the government. It has been identified by Krishnamurthy and Vissing-Jorgensen (2012) that an increase in the appetite of the foreign investors all the safe assets would be reduced which would be available to the other investors and this would enhance the convenience yield. Furthermore, the difference and the shortfall between the physical investment and US savings would also be met by US by borrowing from abroad.

Upside of Foreign Ownership from US Consumer Perspective

If we talk about the effect of rising foreign ownership from the US consumer’s perspective, then in the short run, all the capital that is invested in the US, certainly raises up the gross domestic product of the country and this is beneficial for the performance of the economy. As the GDP of the country increases, the fringe benefits, salaries and the wages also increase thus increasing the rate of employment as 2/3^rd of the gross domestic product is allocated to it. Thus income, productivity and employment areincreased (Fons-Rosen, Christian, SebnemKalemli-Ozcan, Bent E. Sorensen, Carolina Villegas-Sanchez and VadymVolosovych, 2014).

Downside of Foreign Ownership from US Consumer Perspective

The increase in the foreign ownership by foreigner investors might also have negative impacts on the control of the stocks of the US by the foreign investors, distort the research and investment of the US and also reduce the quality of the job. Furthermore, the benefit of the lower interest rates might not last longer and at some point of time, it might become difficult for the US government to finance the debt which would increase the interest rates, reduce the value of the dollar and the standard of living of the US consumers would decline significantly.

Upside of Foreign Ownership from US Federal Government Perspective

There are many upsides of significant foreign ownership from the perspective of the US Federal government. Whenever the government enters into trade deficits, then the shortfall is usually met by the borrowing from the abroad and the differences between the physical investment and US saving is reduced in this way. Furthermore, the domestic interest rates are also lowered as most of the treasury security investors are supporters of a buy and hold policy. The cost of the capital for the corporations is also lowered. The Federal government also supports the expansion of foreign ownership makes the Federal government less constrained in terms of the required finances for any purpose.

Foreign Ownership of US Treasury Securities Case Solution

Downside of Foreign Ownership from US Federal Government Perspective

Lastly, if we consider the downside of the foreign ownership from the perspective of the US Federal government, then it might result in the long run in declining standard of living, slower growth, loss of technological advantage and loss of the skilled employment opportunities. This is not true however; most of the critics believe that the foreign investors might gain control of the US economy. Along with all such risks for the US due to rapidly increasing foreign ownership, there is also no easy way for the Federal government to ban the secondary market auctions of the treasury securities. The ban would not address all the above highlighted economic factors that are occurring due to these foreign purchases..............

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