The US as debtor nation

In 2005, the US net international investment position as calculated by the Bureau of Economic Analysis was -$2.5 trillion or -$2.7 trillion, depending on whether direct investment is valued at current cost or market cost. That means that foreigners owned $2.5-$2.7 trillion more in US assets than US residents owned of foreign assets. Yet also according to the BEA US residents earned more income from the foreign assets they held ($471 billion) than foreigners owned from US assets they held ($454 billion). This was because foreign-owned US assets were held largely in low-yield US Treasury securities while US holdings were in higher-yielding assets such as direct investments (that is, ownership of corporations). That was good news for the US, because it meant that though our gigantic trade deficits were forcing us to borrow more and more from other countries, the service payments on our growing debt were still outweighed by the income earnings from the foreign assets we held. The day of reckoning was somewhere far off in the future. It is as if I had a $100,000 mortgage from PNC Bank and $80,000 in deposits there, but PNC was sending me a check every month. A nice gig if you can get it.

The Wall Street Journal via the New York Times, however, alerts me to the final column of the BEA report cited above, where it is reported that in 2006:Q2 net payments on foreign-owned US assets were $156 billion, versus $153.5 billion of payments on US owned foreign assets. That means for that quarter, for the first time in at least 90 years, the US was shipping money out as payment on its net debt. It's only $2.5 billion in 2006:Q2, or $10 billion at an annual rate, but as interest rates return to normal levels in the US and the current account deficit continues to require us to borrow $800+ billion every year, that figure will grow. At some point the difference between yields on US-owned foreign assets and foreign-owned US assets is likely to shrink to some small number, at which point the interest burden on our foreign debt will become substantial. For example if our net investment position is -$3 trillion and the interest rate on US and foreign assets alike is 5 percent, the US would have to make payments of $150 billion, net, to foreign investors. That's beginning to look like serious money, and a serious drain on the US economy.