Sunday, August 30, 2020

An Increasing Anomaly In The US Balance Of Payments

 On Econbrowser Menzie Chinn has posted about an increase in the scale of US international net indebtedenss. Since the late 1980s the US has been a net debtor internationally, borrowing more from abroad then we are lending and investing there.  The increase in this net indebtedness has noticeably accelerated since our current POTUS took office, and especially this year.  The size of that net indebtedness has gone from about 40% of US GDP to somewhat more than 55%, a pretty substantial increase, given that we have been in this condition for over three decades and in three years by more than a third.  The fiscal stimulus of this year has definitely been overwhelmingly financed by foreign borrowing.

This increase in net indebtedness highlights a longstanding anomaly that now looks even more anomalous.  Even though the US has been a net debtor for over three decades, it has remained a positive net earner on capital income arising from all those international capital movements into and out of the US.  This is mostly measured by the primary income part of the international capital account, which last year was in surplus at a bit over $60 billion.  What is more curious is that this does not seem to have changed much at all over the last five years, some slight changes here and there, but mostly unchanged.  I confess to being mystified as to how an increase in net indebtedness by more than a third has led to essentially no change in the capital income payments situation.

I have not gone digging to get the exact breakdown, but a few years ago it was clear that what was going on is that most of the US assets abroad are in business investments earning large profits and thus high rates of return on the investments, while foreigners are holding assets in the US earning much lower rates of return, most notably US government securities, the outcome of all that foreign borrowing by the US government over a long period of time.  The foreigners have been sending their money here as the "safe haven," an argument or motive that may be breaking down according to some.  So they have been willing to accept the low returns for the supposed safety, while US investors have been taking bigger risks but getting bigger returns as a result.

This all is clear, and maybe the super low interest rates on current US government securities are sufficient to explain why we have seen barely any change in that capital income balance, even as the net indebtedness has substantially increased, but somehow it would seem there must be more, with somehow the US holdings abroad becoming more profitable.  In any case, I do not have a solid explanation for this apparent anomaly.

Barkley Rosser


Tim Worstall said...

Fortunately I know nothing about this so am free to speculate wildly.

I would suggest that our knowledge of capital income is out of date. Think about where we get the information from. What we don't do is monitor each payment in or out and try to assign it to some sector, income, capital, returns to capital etc. Rather, when GDP is worked out we look to things like corporate accounts to see what profits were.

That takes time. We would have no clue of what is happening this calendar year to foreign profits of US corporations. Not at the level of the national accounts at least. We might just about have the raw information for last calendar year by now. And three years back, yes, we probably do have that.

Only a thought....

Fred C. Dobbs said...

Faust, First Part - Johann Wolfgang von Goethe

“Everything transitory is only illusion.”

("Alles vergängliche ist nur ein gleichnis.")

(The character Faust in literature was noted for
making deals with Satan, aka Mephistopheles.)

Faustian bargain - Wiktionary

Faustian bargain: An agreement in which a person abandons his
or her spiritual values or moral principles in order to obtain
knowledge, wealth or other benefits.