Home   Logon   Mobile Site   Research and Commentary   About Us   Call 1.800.621.1675 or Email Us       Follow Us: 

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Click for Bio
Follow Brian on Twitter Follow Brian on LinkedIn View Videos on YouTube
   Bob Stein
Deputy Chief Economist
Click for Bio
Follow Bob on Twitter Follow Bob on LinkedIn View Videos on YouTube
 
  “Net Debtor” Status Still Not a Problem
Posted Under: Europe • Government • Spending

 
At the end of 2010, foreign investors owned $22.9 trillion worth of US assets.  At the same time, Americans owned $20.3 billion of foreign assets.  The difference, when rounded, is $2.5 trillion and is the amount by which the US is considered a "net debtor" to the rest of the world.

Some analysts look at this number and start to wail and gnash their teeth.  They worry that our debts will drag us down.  What these analysts are missing is that despite owing foreigners a great deal more than they owe us – that's why we're called a "debtor" country – US investors consistently earn more on their foreign assets than foreigners earn on their US assets.

Let's imagine there were only two people in the world - Sam and Liu.  Sam borrowed $100 from Liu and paid him 3% per year or $3.  Liu borrowed $50 from Sam and paid him 8%, or $4 per year.  Sam would be a net debtor, but he would earn more every year.  Who would you rather be?

While the globe is an interconnected maze of banks, industries and companies, it is not really any more complicated than this example.  The Commerce Department reports that Americans have earned $727 billion in income on foreign assets over the past year, a rate of return of roughly 3.6%.  Meanwhile, over the same period, foreigners have earned a much smaller $510 billion in income from their US assets, a rate of return of only 2.2%.  The difference is $217 billion.  Or, another way to think about it is that Americans often buy productive assets abroad – think building a factory in India or China – while foreigners often buy US Treasury securities, which only offer a paltry return. 

The $217 billion gap is the largest on record and has been growing in recent years, not only in dollar terms but as a share of GDP.  In other words, it is larger relative to the size of the economy than it was back in the supposedly good old days (before the 1980s) when the US was a net creditor to the rest of the world.

Posted on Friday, December 16, 2011 @ 3:50 PM • Post Link Share: 
Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2020 All rights reserved.