In terms of the bond market, the influence of foreign investors is even greater. Last year, 53 percent of all outstanding U.S. Treasury bonds were held by foreigners, according to the Treasury. That was down from a high of 61 percent two years before, when global investors were fleeing to the safety of U.S. government debt.
Foreign participation is good for American taxpayers, who are able to borrow at lower interest rates because foreign investors and central banks want to store their savings in U.S. government debt. But the increased demand for U.S. debt instruments has also made it harder for the Federal Reserve, which sets the rate at which banks can borrow overnight, to influence the longer-term interest rates that are determined on the bond market and matter most to households and businesses.
Six years ago, when the Fed was raising the federal funds rate in an effort to slow the economy, then-Chairman Alan Greenspan talked about facing a “conundrum” when long-term rates remained stubbornly low. Foreign bond-buying was a big part of that story. More recently, the Fed’s efforts to lower long-term interest rates through an aggressive policy of “quantitative easing” has been stymied at times by offsetting sales of Treasuries by foreigners and foreign central banks moving to reduce their dollar holdings.
Ironically, at the same time that financial globalization is reducing the Fed’s influence over the U.S. economy, it has increased the Fed’s influence over economies elsewhere, particularly those countries in Asia, the Middle East and Latin America that peg their own currencies to the value of the U.S. dollar. The IMF calculates that 38 percent of global economic output comes from fully dollarized countries; if you add in countries that keep a loose peg, it’s not hard to get close to half of the global economy. Those countries are now feeling the effects, in the forms of higher inflation and rapidly rising prices for stocks and real estate, of the nearly $2 trillion the Fed has pumped into the financial system. Foreign central banks have tried to offset these impacts through higher interest rates, restrictions on bank lending and controls of foreign capital inflows, with varying degrees of success.
Economists also are discovering how the globalized supply chains of U.S. based-companies have led government statistical agencies to overstate the size and growth of the U.S. economy — and, along with it, the growth in labor productivity, particularly in manufacturing. The implication of this mismeasurement is that the decline in GDP during the recession was greater than originally thought and the growth since has been weaker, which perhaps helps to explain the disappointing jobs picture.
The source of this mismeasurement is rather technical, having to do with the price estimates for imported parts and material. If the prices of these “intermediate goods” were actually lower than assumed, and the volume higher, as economists now suspect, then the economic value that was added to them by American workers would have been overstated by the official GDP statistics.
Michael Mandel, an economist at the Progressive Policy Institute, was one of the first to sound the alarm about this statistical mismeasurement. Mandel explains that the increase in overall output and productivity has been real — it’s just that much less of it can be attributed to U.S. workers. Instead, more of it reflects the productivity gains of foreign suppliers or the increased efficiency of manufacturing supply chains — gains that more naturally flow to foreign workers and the company owners and executives who set up and manage the supply chains. That would help to explain the absence of wage gains in the United States.
“The mismeasurement problem obscures the growing globalization of the U.S. economy,” Mandel writes. More significantly, it suggests that all that off-shoring and outsourcing has generated less benefit to American workers and the American economy than most economists and the business community have claimed.