The United States used to be a wealthy nation that assisted other nations because it felt that it had an obligation to return some of the riches it enjoyed to less developed countries around the world. That's the story I grew up with. Today's reality is different. The United States is now a debtor nation. with more than 50% of its government debt held by foreigners who have been lending while we've been spending. That's the story that today's children will have to make sense of, as they grow up and realize that their horizons may well be limited by the burden of enormous debt.
There is another way to think about the US that is covered in a recent update of a Congressional Research Service report--the net investment status for the US, which compares how much Americans have invested abroad (a little more than $12 trillion, using historical cost) with how much foreigners have invested in this country (almost $15 trillion, using historical cost). That report is available here. In this comparison, the US is also a "net debtor nation."
What should every American know from this report? I'd pick the following:
- Foreign-owned U.S.Treasury securities went down from more than $643 billion in 2005 to $594.2 billion in 2006. Does this mean that our appetite for more and more debt is not favorably regarded by foreign investors, who aren't as thrilled to hold U.S. Treasuries now as they were?
- Foreign ownership of U.S. currency increased slightly, from $351.7 billion to $364.3 billiion from 2005 to 2006;
- From the 1920s to the 1980s, the US was a "net investment creditor" (the US was investing in and owning foreign assets); but since 1980, the US has become a "net investment debtor" (foreigners are investing in and owning US assets), with that "net negative" having grown to about 21% of gross domestic product, "marking a substantial increase in the net investment debt position over the previous decade" (it has not been lower than 15% at any point during the Bush Administration)
- Official ownership of US assets is small compared to private ownership (about 16% of the total foreign investment in US assets); nonetheless, foreign "official" acquisitions of U.S. Treasury securities are sometimes used by foreign governments to affect the foreign exchange price of the dollar;
- Some economists have expressed concern about the switch to net debtor status, since the US will now be paying out to foreigners more income that will mostly be repatriated to foreign countries than it will be bringing into the country from foreign investments. That "net outflow of income payments acts as a drag on the U.S. economy";
- The U.S. paid $131 billion to foreign holders of U.S. government securities in 2006, up 30% from the amount paid in 2005;
- Some analysts are also concerned about the amount of foreign ownership of U.S. financial wealth--"foreign investors now own nearly 50% of total U.S. Federal debt and more than half of the outstanding publicly traded U.S. Treasury securities. Some observers argue that such investments could spur an economic crisis in this country should foreign investors decide to pull their money out of the investments, whether for economic or political reasons.”
That last point may be especially worrisome, given the current financial crisis in the US and the way it has affected investors around the globe.
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