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