US massive external debt not yet cause for concern: report
Despite being by far the most indebted country in the world, the US position is not as bad as it seems
Wim Boonstra writes in Eurasia Review that a mixture of factors make the US’ unprecedented accumulation of foreign debt less of a concern than it seems at first glance:
A weakening of the dollar quickly helps the US external investment position to improve, not so much via the traditional trade channel, but via currency gains on its foreign liabilities. The beneficial composition of its international assets and liabilities also helps to explain why its net international investment position is less negative than one would expect from looking only at the cumulative deficits on the current account. This second factor also explains why the US, in absolute figures the largest debtor country on the planet, still earns more capital income on its foreign assets than it has to pay on its foreign debt. On a net basis, the international debt position of the US is not a drag on the current account.
The conclusion is that, as long as it can finance its external obligations in dollars, the country’s international debt position is no cause for concern for the US. For the rest of the world, of course, the story may be different.