Borrowing Without Debt? Understanding the U.S. International Investment Position
Although The U.S. Payments Position May Not Be As Weak As Commonly Thought, The Factors That Bolster It Are Likely To Be Temporary
By Matthew Higgins, Thomas Klitgaard, and Cédric Tille
Cedric Tille is a Senior Economist at the International Research Function of the Federal Reserve Bank of New York. His has written on several issues related to external assets and liabilities, and their implications for the current account and international adjustment. His work encompasses both theoretical and applied aspects. He received his Ph.D. in economics from Princeton University.
Thomas Klitgaard is an Assistant Vice President in the International Research Function of the Federal Reserve Bank of New York. His research interests include global financial flows, current account adjustment, and exchange rates. He received his Ph.D. in economics from Stanford University in 1985.
Sustained large U.S. current account deficits have led some economists and policymakers to worry that future current account adjustment could occur through a sudden and disruptive depreciation of the dollar and a sharp drop in U.S. consumption. Two factors that, to date, have cast doubt on such concerns are the stability of U.S. net external liabilities and the minimal net income payments made by the United States on these liabilities. We show that the stability of the external position reflects sizable capital gains stemming from strong foreign equity markets and a weaker dollar—conditions that could be reversed in the future. We also show that while minimal U.S. net income payments reflect a much higher measured rate of return on U.S. foreign direct investment (FDI) assets than on U.S. FDI liabilities,ongoing borrowing is likely to overwhelm this favorable rate of return, pushing the U.S. net income balance more deeply into deficit.
In addition, we review the argument that the United States holds large amounts of intangible assets not captured in the data—assets that would bring the true U.S. net investment position close to balance. We argue that intangible capital, while a relevant dimension of economic analysis, is unlikely to be substantial enough to alter the U.S. net liability position
The views presented are those of the authors, and do not represent the views of the Federal Reserve Bank of New York or the Federal Reserve System. This paper was presented at the NABE Annual Meeting on September 10, 2006.