For the the first time in at least 90 years, the US is paying more to its foreign creditors than it receives from investments abroad

International
For the the first time in at least 90 years, the US is paying more to its foreign creditors than it receives from investments abroad
By Finfacts Team
Sep 26, 2006, 06:24

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Intel headquarters, Santa Clara, California - - US direct investments abroad have returned an average 8% since 2001.

In recent years, Americans and their government have been able to borrow trillions of dollars from abroad to fund consumption and tax cuts at home but as the borrowings have grown, US payments on its net foreign debt barely grew.

However, as interest rates have risen, America's debt payments are begining to rise. For the the first time in at least 90 years, the US is paying more to its foreign creditors than it receives from its investments abroad. The gap reached $2.5 billion in the second quarter of 2006. The change in recent years has meant that US quarterly debt payments of about $22 for each American household compares with the $31 in net investment income per household it received a year earlier.

In a report, The Wall Street Journal says that while the gap is still small within the context of the $13 trillion American economy and the trend could reverse if US interest rates decline, however economists say America's emergence as a net payer illustrates an important point: In years to come, a growing share of whatever prosperity the nation achieves probably will be sent abroad in the form of debt-service payments. That means Americans will have to work harder to maintain the same living standards -- or cut back sharply to pay down the debt.

Since the end of 2001, when the current economic expansion began, the nation's consumption, investment and other outlays have exceeded income by a cumulative $2.9 trillion -- the largest gap on record. That current-account deficit contributes directly to the nation's total foreign debt, the value of all the U.S. stocks, bonds, real estate, businesses and other assets owned by non-US residents. As of the end of 2005, total US foreign debt stood at $13.6 trillion -- or about $119,000 per household. Net foreign debt, which excluded the $11.1 trillion value of U.S.-owned foreign assets, was $2.5 trillion.

The Journal says that foreigners have been willing to accept a much lower return on relatively safe US investments than US investors have earned on their assets abroad. China, which since 2001 has invested some $250 billion in US Treasury bonds yielding around 5% or less -- part of a strategy to boost its exports by keeping its currency cheap in relation to the dollar.

By contrast, US direct investments abroad have returned an average 8% since 2001, according to US Commerce Department data. Meanwhile, US investors in emerging-market stock funds earned an average annual return on their investments of 22.3%, according to financial-research firm Morningstar Inc. (The Commerce Department counts only part of that as income).

The Journal says that even without any major changes in rates, economists expect the burden of foreign-debt payments to rise. Estimates of that burden 10 years from now range anywhere from 0.5% to 2% of GDP, depending largely on whether the U.S. manages to curb its current-account deficit. If the deficit expands significantly and the US stops earning a premium on its investments abroad, the burden could reach 5% of GDP, according to calculations made by John Kitchen, an economist in the White House's Office of Management and Budget.

US foreign debt as a share of GDP, stood at about 20% at the end of 2005, compared with the 15% average of the 12-nation euro zone. The United Kingdom's net debt is 17% of GDP. Mexico's is 44%.