Borrowing Without Debt? Understanding the U.S. International Investment Position

19 Pages Posted: 13 Dec 2006

See all articles by Matthew Higgins

Matthew Higgins

Federal Reserve Bank of New York

Thomas Klitgaard

Federal Reserve Bank of New York

Cédric Tille

Graduate Institute of International and Development Studies (HEI)

Date Written: December 2006

Abstract

Sustained large U.S. current account deficits have led some economists and policymakers to worry that future current account adjustment could occur through a sudden and disruptive depreciation of the dollar and a sharp drop in U.S. consumption. Two factors that, to date, have cast doubt on such concerns are the stability of U.S. net external liabilities and the minimal net income payments made by the United States on these liabilities. We show that the stability of the external position reflects sizable capital gains stemming from strong foreign equity markets and a weaker dollar — conditions that could be reversed in the future. We also show that while minimal U.S. net income payments reflect a much higher measured rate of return on U.S. foreign direct investment (FDI) assets than on U.S. FDI liabilities, ongoing borrowing is likely to overwhelm this favorable rate of return, pushing the U.S. net income balance more deeply into deficit.

In addition, we review the argument that the United States holds large amounts of intangible assets not captured in the data — assets that would bring the true U.S. net investment position close to balance. We argue that intangible capital, while a relevant dimension of economic analysis, is unlikely to be substantial enough to alter the U.S. net liability position.

Keywords: current account deficit, valuation effect, intangible capital

JEL Classification: F32, F34, F36, F41

Suggested Citation

Higgins, Matthew and Klitgaard, Thomas and Tille, Cedric, Borrowing Without Debt? Understanding the U.S. International Investment Position (December 2006). FRB of New York Staff Report No. 271. Available at SSRN: https://ssrn.com/abstract=951031 or http://dx.doi.org/10.2139/ssrn.951031

Matthew Higgins

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Thomas Klitgaard (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Cedric Tille

Graduate Institute of International and Development Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

HOME PAGE: http://sites.google.com/site/cedrictilleheid/home

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