> Is Bergsten talking about direct investment or portfolio investment.
> If it's portfolio, I can't see how you can get around market interest
> rates. But if it's direct, the reason mainly is that U.S. investments
> happened long ago, whereas foreigners' investments in the U.S. are
> more recent. They paid higher prices and they've got startup costs to
> contend with.
He's definitely talking about total net investment income, portfolio and direct combined:
"These annual imbalances add to the negative net international investment position of the United States, which reached $2.2 trillion at the end of 2000 as a cumulative result of the deficits of the past twenty years. As recently as 1980, the United States was the world's largest creditor country. It has now been the world's largest debtor for some time. Its negative international investment position is rising by 20-25 percent per year. This trajectory too is clearly unsustainable.
"These external deficits and debts levy several significant costs on the United States: Over the longer run, they mean that we will pay rising annual amounts of debt service to the rest of the world with a consequent decline in our national income. These payouts are surprisingly small so far, amounting to only about $14 billion in 2001, because foreign investment by Americans yields a substantially higher return than foreigners' investments here. However, the numbers are clearly negative and will become substantially larger over time."
Age differences are a sensible explanation for FDI, but not for portfolio investment. I guess my question is why returns on assets in the US are less than returns on assets abroad. Lately economists like Joseph Stiglitz and Dean Baker have been talking a lot about the impact of reserve-building in the developing world. I wonder if the ongoing need to keep building those reserves - mostly parked in low-yielding Treasury debt - constitutes an artificial subsidy to the demand for US assets and keeps US interest rates artificially low while acting as an impediment to the "inevitable" dollar outflow that everyone keeps expecting.
Seth