What is the American National Debt
The US is heavily indebted abroad - how dangerous is that?
The US's permanent trade deficits are financed by foreign creditors. The US’s net debt abroad now accounts for two-thirds of economic output. This is similar to that of the former euro crisis countries.
That happened: The US is the world's largest debtor, which at first glance is worrying. By the end of 2020, what Americans owe the rest of the world exceeded what the world owes the United States by $ 14 trillion. That 14 trillion is roughly two-thirds of the US's annual economic output.
What is the international investment position? For example, stocks and bonds that Americans hold abroad, or foreign subsidiaries of American companies. At the same time, foreigners own American equities and bonds or have subsidiaries in the USA. If you take the difference between the two positions, you get the net wealth position of a country.
Swiss people, for example, have assets of over CHF 5.3 trillion abroad, while foreigners hold Swiss assets of over CHF 4.7 trillion. In contrast to the USA, the balance for Switzerland is very positive at 662 billion francs and makes up almost the economic output of a year.
Of the 50 or more largest economies in the world, there are only four that have an even higher net debt than the USA: These are Ireland, Greece, Portugal and Spain, as the economist Gian Maria Milesi-Ferretti recently said in an analysis of the Think Tanks Brookings Institution has shown.
Ireland is a special case because multinational companies have often parked their intangible assets such as patents and licenses there. But it is already striking that we are talking about four countries, all of which had to give way during the euro crisis and received different degrees of support from the international community. One could get a little queasy for the USA.
It's all about this: The US's net debt has risen continuously. In 2019 it accounted for 50 percent, and a decade ago only 16 percent of the gross domestic product (GDP).
A first cause for this development is quickly found. Between 1995 and the financial crisis, the USA had, in some cases, very high trade deficits. So the Americans have consumed more than they produced, and the rest of the world has closed the gap. For a good decade now, the current account deficits have been 2 to 3 percent of GDP. The US wealth position has deteriorated much more during this period. How can this be explained?
Since 2010, the dollar has gained in weight compared to other currencies. This means that Americans' fortunes abroad are worth less in terms of dollars. At the same time, the US stock markets fared significantly better than their counterparts abroad. Foreign owners of American stocks, which are then worth more, are also happy about this. Because of these two valuation effects alone, the position of the USA has deteriorated markedly over the past decade.
This is what we mean: In any case, it looks less bad for the USA than one would think at first glance. A booming Wall Street worsens the net position of the USA. But this is actually a positive signal. Investors expect American companies to continue to flourish. If this drives up US net debt, you shouldn't be frightened. If the outlook worsened, US stock prices would fall and the dollar would lose value, which would automatically reduce US net debt.
In addition, the USA did not borrow in foreign currency, but in their own, the dollar. Countries often experience financial difficulties because their debts are denominated in a foreign currency. If their value date then loses value, the debt borrowed in foreign currency climbs. In the case of the USA, however, there is no such danger.
Thirdly, Americans earn a significantly higher return on their foreign assets than foreigners on their assets in the USA. This has to do with the very low yields on US government bonds.
At the moment, the USA, as the world's largest debtor, does not seem to be very vulnerable, but it doesn't always have to stay that way, especially because the debt is currently significantly higher than it was in the wake of the financial crisis. The current account deficits could also rise again if the US economy actually grew by more than 5 percent this year. The USA's debtor position is therefore no longer a quantité négligeable.
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