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Sunday, May 03, 2015

'US External Debt: A Curious Case'

Should we be worried about the U.S. net international investment position (the difference between US assets abroad and foreign claims on the US)? Paul Krugman says it's "actually a symptom of US relative strength":

As Tim Taylor notes, the U.S. net international investment position ... has moved substantially deeper into the red in recent years...
But why? You might be tempted to say that it’s obvious: we’ve been running big budget deficits, borrowing the money from foreigners, so of course our debt to those foreigners is surging. But that story implicitly requires a surge in the trade deficit (or more precisely the current account deficit, which includes investment income), which hasn’t happened. ...
So it’s not about borrowing vast sums abroad... But what is it? ... The big move is a sharp rise in the value of foreign holdings of US equity, not matched by any comparable rise in US holdings of foreign equity. What’s that about?
The answer, I believe, is that we’re looking at the differential performance of stock markets. ... So the value of foreign holdings of US equities ... has surged along with the Obama stock market, while US holdings abroad have seen no comparable boost.
And this means that the plunge in the U.S. international investment position, far from showing weakness, is actually a symptom of US relative strength, reflected in strong stock prices.
I think I’m right about this, although happy to hear alternative stories.

    Posted by on Sunday, May 3, 2015 at 09:01 AM in Economics, International Finance | Permalink  Comments (75)


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