This report provides an overview of the role foreign investment plays in the U.S. economy and an assessment of possible actions a foreign investor or a group of foreign investors might choose to take to liquidate their investments in the United States. Concerns over the potential impact of disinvestment have grown as national governments have become more active investors and as uncertainty over the risks associated with securities backed by sub-prime mortgages has increased volatility in financial markets. Actions taken by foreign investors to liquidate their holdings could affect the U.S. economy in a number of ways due to the role foreign investment plays in the United States and due to the current mix of economic policies the United States has chosen. The impact of any such action on the economy would also depend on the overall condition and performance of the economy and the financial markets.

If the economy were experiencing a strong rate of economic growth, the impact of a foreign withdrawal likely would be minimal, especially given the dynamic nature of credit markets. If a withdrawal occurred when the economy were not experiencing robust rate of growth or if credit financial markets were under duress, the withdrawal could have a stronger effect on the economy.

The particular course of action foreign investors might choose to take and the overall strength and performance of the economy at the time of their actions could affect the economy in different ways. Congress likely would become involved as a result of its direct role in making economic policy and its oversight role over the Federal Reserve. In addition, the actions of foreign investors could complicate domestic economic policymaking. Foreign investors who decide to liquidate their holdings of one particular type of investment would normally need to look for other types of assets to acquire. While there are a multitude of possible strategies foreign investors could pursue, this analysis assesses the impact of four of the most likely strategies a single large foreign investor or a group of foreign investors could choose to employ to reduce or withdraw entirely their holdings of U.S. financial assets:

* A rapid liquidation of U.S. Treasury securities.
* A shift in the make-up of foreign investors’ portfolios among various dollar-denominated assets.
* A rapid shift from dollar-denominated assets to assets denominated in other currencies.
* A slow shift in the make-up of future accumulations of assets away from dollar-denominated assets to assets denominated in currencies other than the dollar.

This report will be updated as events warrant.

Foreign Ownership of U.S. Financial Assets: Implications of a Withdrawal

Given its relatively low savings rate, the U.S. economy depends heavily on foreign capital inflows from countries with high savings rates (such as China) to help promote growth and to fund the federal budget deficit. China has intervened heavily in currency markets to limit the yuan’s appreciation. As a result, China has become the world’s largest and fastest growing holder of foreign exchange reserves (FER), which totaled $1.4 trillion as of September 2007. China has invested a large share of its FER in U.S. securities, which, as of June 2006, totaled $699 billion, making China the 2nd largest foreign holder of U.S. securities (after Japan). These securities include Treasury debt, U.S. agency debt, U.S. corporate debt, and U.S. equities.

U.S. Treasury securities are issued to finance the federal budget deficit. Of the public debt that is privately held, about half is held by foreigners. As of October 2007, China’s Treasury securities holdings were $388 billion, accounting for 16.8% of total foreign ownership of U.S. Treasury securities and making China the second largest foreign holder of U.S. Treasuries after Japan. From March to October 2007, China’s Treasury holdings declined by about 8%.

Some U.S. policymakers have expressed concern that China might try to use its large holdings of U.S. securities, including U.S. public debt, as leverage against U.S. policies it opposes. For example, various Chinese government officials are reported to have suggested that China could dump (or threaten to dump) a large share of its holdings to prevent the United States from implementing trade sanctions against China’s currency policy. Other Chinese officials have reportedly stated that China should diversify its investments of its foreign exchange reserves away from dollar- denominated assets to those that offer higher rates of returns.

A gradual decline in China’s holdings of U.S. assets would not be expected to have a negative impact on the U.S. economy (since it be matched by increased U.S. exports and a lower trade deficit). However, some economists contend that attempts by China to unload a large share of its holdings U.S. securities holdings could have a significant negative impact on the U.S. economy (at least in the short run), especially if such a move sparked a sharp depreciation of the dollar in international markets and induced other foreign investors to sell off their U.S. holdings as well. In order to keep or attract that investment back, U.S. interest rates would rise, which would dampen U.S. economic growth, all else equal. Other economists counter that it would not be in China’s economic interest to suddenly sell off its U.S. investment holdings. Doing so could lead to financial losses for the Chinese government, and any shocks to the U.S. economy caused by this action could ultimately hurt China’s economy as well.

The issue of China’s large holdings of U.S. securities is part of a larger debate among economists over how long the high U.S. reliance on foreign investment can be sustained, to what extent that reliance poses risks to the economy, and how to evaluate the costs associated with borrowing versus the benefits that would accrue to the economy from that practice. This report will be updated as events warrant.

China’s Holdings of U.S. Securities: Implications for the U.S. Economy

Reza Aslan, on why the next American president should leave God out of the war on terror.

What America Must Do

For nearly a decade, one man has ruled Russia. Marked by scandal, enormous oil profits, and confrontation with the West, Vladimir Putin’s tenure has been nothing if not dramatic. A look back at some of the moments that defined his presidency.

Photo Essay: The Many Faces of Putin

A growing conventional wisdom holds that Vladimir Putin's attack on democracy has brought Russia stability and prosperity -- providing a new model of successful market authoritarianism. But the correlation between autocracy and economic growth is spurious. Autocracy's effects in Russia have in fact been negative. Whatever the gains under Putin, they would have been greater under a democratic regime.

The Myth of the Authoritarian Model

This is the latest in a series of reports from the Combating Terrorism Center drawing on newly released information from captured al-Qa’ida documents maintained in the Defense Department’s Harmony Data Base. The report is a preliminary analysis of records containing background information on foreign fighters entering Iraq via Syria over the last year. The data used in this report was coded from English translations of these records and undoubtedly contains some inaccuracies de to imprecise translation as well as through errors in the transcription process. The CTC plans further studies based on the Sinjar Records and expects to hone and improve the accuracy of our database as we do so.

Al-Qa’ida’s Foreign Fighters in Iraq: First Look at the Sinjar Records

Kaleidoscopic ... and the New Middle Ages ...

“That’s how the city rolls right now.”

The Americans are haunted by the possibility that Iraq could go the way of Afghanistan, where Americans initially bought the loyalty of tribal leaders only to have some of them gravitate back to the Taliban when the money stopped.

The government has made only the most halting steps toward rapprochement with the Awakening groups, even those who have been fighting insurgents for months in their neighborhoods.

In interviews with more than a dozen sheiks in the province, along with police officers, local leaders and imams, not one expressed any trust in the government of Prime Minister Maliki.

And for the Americans who helped create and nurture the movement, the initial excitement has been tempered by the challenge of managing a huge, and growing, force where many of the men have shadowy pasts.

The Awakening groups in just their area of southern Baghdad could not seem to get along: they fought over turf and, it turned out in this case, one group had warned the other that its members should not pay rent to Shiite “dogs.”

The Awakening movement, a predominantly Sunni Arab force recruited to fight Sunni Islamic extremists like Al Qaeda in Mesopotamia, has become a great success story after its spread from Sunni tribes in Anbar Province to become an ad-hoc armed force of 65,000 to 80,000 across the country in less than a year. A linchpin of the American strategy to pacify Iraq, the movement has been widely credited with turning around the violence-scarred areas where the Sunni insurgency has been based.

But rivalries and sectarianism are still undermining the Americans’ plans. And in particular, the Awakening’s rapid expansion — the Americans say the force could reach 100,000 — is creating new concerns.

In a Force for Iraqi Calm, Seeds of Conflict

To be sure, there were plenty of instances in which American officials did less than they could have. Diplomats or politicians intent on preserving the relationship with Pakistan for other strategic reasons (its help in the Cold War and then the war on terror) downplayed evidence of its nuclear chicanery for fear that any revelations would undermine cooperation.

The most egregious case involved Richard Barlow, a young CIA analyst who figures prominently in all three books. Barlow defied the cautious dissembling about the Pakistani nuclear program that was the official line -- and then was run out of the CIA for calling the intelligence as he saw it. In another instance, the State Department apparently intervened to downplay the potential proliferation implications of a smuggling trial. Customs officials also repeatedly failed to ask questions that would have quickly led them to realize what Khan and his operatives were up to.

But despite such missed opportunities, what becomes clear in these books is that the United States at various points drew on most of the tools it had to influence Pakistan, and none of them had much effect on its nuclear ambitions.

'The Nuclear Jihadist', 'Deception', 'America and the Islamic Bomb'

China's rise will inevitably bring the United States' unipolar moment to an end. But that does not necessarily mean a violent power struggle or the overthrow of the Western system. The U.S.-led international order can remain dominant even while integrating a more powerful China -- but only if Washington sets about strengthening that liberal order now.

The Rise of China and the Future of the West

It's like the jihadist equivalent of the YouTube debates!

Al-Qaeda's media arm, al-Sahab, has invited individuals, organisations and journalists to submit questions for an open interview with Ayman al-Zawahiri.

See also, How's al-Qaeda doing? You decide, By Michael Scheuer:

If an analyst in al-Qaeda's intelligence services or a journalist friendly to al-Qaeda were asked to compile a roundup of news stories from 2007 that supported his sympathies, here is what he would write. It would be a reasonably effective and sophisticated bit of open-source reporting (or what some might even call disinformation) that would be carefully slanted to the author's agenda, and al-Qaeda might itself publish or distribute the article as evidence of the decay of the West.

BBC NEWS | Middle East | Al-Qaeda to give 'open interview'