Economic Uncertainty Scares Off Foreign Investors

President Obama has stated that international investors should have “absolute confidence” in the safety of U.S. government debt, but many foreign leaders are beginning to worry. Foreigners withdrew funds from American assets in record amounts in January—except for China, which increased its load of U.S. debt.

Net foreign capital outflows reached a record $148.9 billion in January, in contrast to $86.2 billion in inflows in December, according to the Wall Street Journal.

The cost of insuring against a U.S. default has risen by about 60 percent since the end of last year. Even Chinese Premier Wen Jiabao recently said he was “definitely a little bit worried” about Beijing’s U.S. holdings. China is the largest foreign creditor to the U.S. government, with total holdings of $739.6 billion, according to data from the Treasury Department.

Some are concerned that new levels of government intervention and micromanagement in the economy might scare off more investors. Writing for the National Review, Mark Steyn noted that investors will be dubious about putting their money into the U.S. when legal contracts can be annulled by “ex post facto” laws, as in the case of the AIG executive bonuses scandal.

“The investor class invests in jurisdictions where the rules are clear and stable,” wrote Steyn. “Right now, Washington is telling the planet: In our America, there are no rules.”

Furthermore, the Obama administration has announced that it will call for increased government oversight of executive pay at all banks, Wall Street firms, and possibly other companies as part of a sweeping plan to reform financial regulation.

These reforms come as a reaction to AIG’s $165 million in bonuses paid using bailout funds as part of a previously existing and legally binding contract—a sum that amounts to only 1/18,500 of the $3.1 trillion federal budget.