U.S. External Debt: How Has the United States Borrowed Without Cost? (CRS Report for Congress)
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| Release Date |
Jan. 19, 2007 |
| Report Number |
RL33570 |
| Report Type |
Report |
| Authors |
Craig K. Elwell, Government and Finance Division |
| Source Agency |
Congressional Research Service |
Summary:
Despite the huge increase in U.S. external debt, the investment income component of the current account has remained in surplus. The size of this surplus has varied, hitting a low of $4 billion in 1998 and a high of $37 billion in 2003, but over the past 25 years, the surplus has remained between $15 billion and $30 billion. Since 2003, the surplus has fallen, reaching $28 billion in 2004 and $11 billion in 2005. This means that the United States, although a large net debtor, has been borrowing free of any economically meaningful debt service cost. What is behind this apparent paradox? Attempts to resolve this paradox have considered special factors that tend to mitigate the effects of the current account deficit on the value of foreign debt, the role of unmeasured U.S. exports, and bias in data collection.
A 2005 study by economist William Cline argues that two factors have worked to limit the impact of large current account deficits on the nation's economic debt service payments. First is the effect of valuation changes that have caused the magnitude of U.S. net indebtedness to grow much more slowly than the size of the current account deficits would indicate. Second is the effect of asymmetrical capital returnsâthe United States earns a higher rate of return on its foreign investments than foreigners earn on their U.S. investments.
A more controversial interpretation of the paradox of the United States having large net external liabilities along with an investment income surplus has been provided by economists Hausmann and Sturzenegger. They maintain that the official current account data have failed to record a large volume of service exports, so large that the United States has in truth remained a large net external creditor. The name they give to these invisible assets is "dark matter," for, like the astronomical phenomenon, they have a visible effect (generating investment income) but stem from a source that cannot be seen (hidden service exports).
Looking at the sizable gap between the rate of return on U.S. foreign direct investment (FDI ) and that on FDI in the United States, the anomaly is not the high U.S. yield (7.5%) but the suspiciously low foreign yield (2.5%). Why pour hundreds of billions of investment into the United States for a yield below that available from holding virtually risk free U.S. Treasury bonds? Or, given the high yield on U.S. FDI, it would seem likely that there are superior investment opportunities elsewhere. This apparent violation of rational economic behavior suggests that there could be something wrong with the FDI earnings data reported by foreign firms operating in the United States.
While the rate of past debt accumulation may have been smaller than what the size of U.S. current account deficits would indicate, and while the size of the U.S. net debt position and investment income balance may be subject to significant measurement error, the sheer size of prospective trade deficits will mean that, if not now, the United States will soon be a net debtor and will also soon have a sizable deficit in investment incomeâincurring a true debt burden. This report will be updated as events warrant.
