David R. Henderson  

Timothy Taylor on Net Debtor Nations

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Conversable Economist Timothy Taylor has an excellent post on the net international investment position of the United States. Tim has been hitting two-baggers, three-baggers, and home runs for a long time now. If you want to see a well-informed economist write calmly about the modern economic landscape and if you don't have his blog on your RSS feed, I highly recommend that you do so.

You can see a criticism coming, right? Why would I praise him this heavily if I'm not about to make a criticism. Well, you're right. I am. But the praise above is completely genuine.

My criticism is of the language Timothy and the IMF use to talk about net international investment positions. Both the IMF and Tim claim that if foreigners own more U.S. assets than Americans own of foreign assets, then the United States is a net debtor. That's wrong.

Here's what I wrote in "America for Sale?" in Reason, July 1988.

First, no economist or journalist who claims that America is a net debtor has presented data on net debt. Those who write about the subject typically classify foreign-owned U.S. stocks and real estate as debt. But they are not: My ownership of my house, for example, makes no one indebted to me.

The admittedly cumbersome term to describe what people are concerned about is the U.S. net international investment position, that is, U.S. assets abroad--stocks, bonds, structures, and equipment--minus foreign-owned assets here.


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CATEGORIES: International Trade




COMMENTS (6 to date)
Dan Hill writes:

Well said, David. The problem you highlight is basically one of confusing equity for debt. Foreigners who own assets in the US are more like shareholders than lenders. The issue with debt is always that you have to service the repayment stream regardless. Whereas these foreign 'shareholders' only get paid if their assets are productive and making America wealhier.

Of course if you get people to understand that, then you've got deal with the nonsense about 'foreigners buying up America.' I don't know about you, but when I came here as a foreigner and started acquiring assets, I basically did the same things with them as Americans do. Hard to see how that makes anyone worse off (or if it did, how it suddenly stopped being a problem once I became a citizen.) It's especially dumb when people worry about foreigners buying farmland. What exactly do people fear if for example the Chinese buy a ranch in Wyoming? That they will stop raising cattle (and make no money)? Ship the ranch back to China?

Kevin Erdmann writes:

This is a really curious problem. I think most of what is going on is that emerging market capital lacks local low risk outlets, so there has been a huge inflow of capital into the u.s. And foreign capital in the u.s. is overwhelmingly debt. U.S. capital abroad is mostly equity.

So U.S. capital abroad makes tons more than foreign capital in the US. Those net profits are what pay for some of our trade deficit. The rest is paid for by all the fresh new capital that has to keep coming in to the U.S. just to keep our earnings advantage from growing even more just from reinvested capital.


The accounting is based on historical cost, which makes the official cumulative numbers over time less meaningful. The funny thing is, I think if you did bottom up valuations, foreign assets in the US would have a higher market value than US assets abroad. Yet US assets abroad make tons more profit and have basically always made more profit than foreign assets in the US. There is no coherent way for this to be true. (A lower market value should at least occasionally have lower profits.)

I think we should look at the exchange of low risk debt for high yielding corporate assets abroad as a service the US supplies to the rest of the world. The profit we earn from this shows up, not in GDP, but in gross domestic purchases. The net imports we receive aren't something that has to be rebalanced. They are payment for financial services rendered.

Jon writes:

We have twenty percent of world GDP at PPP... Yet have about fifty percent of the investable securities market. It's not surprising foreigners own more U.S. Securities than Americans own foreign securities.

Kevin Erdmann writes:

Jon, that's an interesting point. From a finance perspective, I wonder if a lot of what is going on here is that local firms in emerging markets earn a liquidity premium because their securities markets arent as fully developed. By pulling foreign operations into their corporate structure, US corporations immediately capture value because those operations gain liquidity by being a part of a firm that trades in our liquid markets.
I suspect that this has a lot to do with the expansion of US finance. A big chunk of foreign capital is being routed through US capital markets in a roundabout sort of way, because our markets provide value through established institutional stability and liquidity. As I mentioned above, this doesn't get captured in GDP measures. I think the supposed problem of finance being large but not adding utility to the US economy is because the gains from a lot of finance are coming through Gross Domestic Purchases. We don't attribute those imports as being a function of our finance sector. But they are.

vikingvista writes:

As if "trade deficit" wasn't misnomer enough, now we have "trade debt" as well!

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