The U.S. Earns More From Less

Since 1989, foreigners have owned more assets in the U.S. than Americans have abroad. At the same time, Americans have been earning more income from their $20 trillion of overseas assets than foreigners have been earning from their $28 trillion of U.S. assets. In other words, although the U.S. is a debtor nation, it has a positive net income. This is largely due to the types of assets that foreigners tend to hold in the U.S. versus the types of assets Americans hold abroad.

US Net IIPUS Net Investment IncomeForeigners own a lot more portfolio debt (like corporate bonds and treasuries) in the U.S. than Americans own in portfolio debt abroad. What Americans own a lot more of are direct investments like factories and real economic assets. Excluding portfolio debt would bring the U.S. net international investment position back into positive territory at an average $1 trillion since 2000, making it a creditor nation as it had long been prior to 1989.

While the U.S. ends up paying for the deficit it has in portfolio debt, it earns significantly more from the surplus it has in direct investment income. In other words, the income earned from direct investments is greater than the income paid to foreign owners of portfolio debt. This makes sense as the returns on debt securities like government treasuries are relatively low and are often used as safe-havens rather than profit-generators. China, the largest foreign owner of U.S. treasuries, is a creditor nation but with a negative net income. This is because large shares of the international assets that it owns are low-yielding reserve assets (largely in the U.S.).

A positive net income from a negative net international investment position is a deal many countries would take. But the U.S. cannot take its situation for granted. An increase in interest rates or perceived riskiness of its debt could raise the amount demanded from holding U.S. debt. This translates into raising the amount the U.S. would need to pay its foreign debt-holders, who own $10.4 trillion as of the end of 2015. Though that risk is low, it should never be taken for granted. On the asset side, the good news is that U.S. companies are making productive investments in real economic assets – the kind that has the best potential to help growth in both countries. More direct investment into the U.S should be welcome. Though that would lower net income for the U.S., the nature of the investment would be better positioned to support economic growth rather than to finance U.S. debt.






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