question for the list

Doug Henwood dhenwood at panix.com
Thu May 23 14:57:00 PDT 2002


Seth Ackerman wrote:


>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.

Ok, been looking at the U.S. international accounts. The balance on investment income slipped into the red in 1998. It had been positive to the tune of 0.6-1.0% of GDP through the 1960s and 1970s, and started falling in the early 1980s, when the twin deficits (federal and trade) became news. But the major driving force is in interest payments on U.S. Treasury paper. Direct investment income is still positive on balance. Private securities only went negative last year, but the numbers are pretty small.

Reserve building is a subsidy to the U.S.; the need to keep dollar balances encourages more buying of U.S. Treasury paper than would otherwise be the case, meaning that interest rates are lower than they would otherwise be. (Also, large holdings of U.S. currency abroad are essentially an interest-free loan to the US.) But still the Treasury has to pay interest on bills held in reserves.

Right now the major vulnerability isn't that the income balance is getting onerous - it's the cash flow issue: if foreigners stop buying new U.S. assets, then we'll have a serious financing problem. We need an inflow of something like $1.7 billion every business day, which isn't small change.

Doug



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