Foreign Debt of U.S. Doubles to $263 Billion
The nation’s foreign debt soared to an estimated $263.6 billion last year, with the United States lengthening its lead as the country with the world’s largest debt, the Commerce Department reported Tuesday.
The net foreign debt--which attempts to measure the difference between the amount foreigners own in the United States and the amount U.S. investors own abroad--more than doubled from a revised $111.9 billion for 1985.
Soaring Trade Deficits
Behind the nation’s rapid shift from the world’s largest creditor as recently as 1982 to its biggest debtor has been the string of soaring U.S. trade deficits over the last five years.
Many economists predict that the net debt burden of the United States will rise to about $1 trillion by the early 1990s as large trade deficits continue to swell the coffers of foreigners, leaving the nation more vulnerable to the vagaries of overseas investors.
“We can live with these kinds of debt levels as long as foreign (investors) want to buy U.S. debt,” said Martin Regalia, director of research and economics at the National Council of Savings Institutions. “But we don’t have control of our own destiny.”
Worries Downplayed
But some analysts downplayed worries over the foreign debt situation, arguing that the rise of foreign investment in the United States reflects continuing confidence in the nation’s ability to prosper and comfortably finance its foreign debts.
“This is not a big deal,” said Alan Reynolds, chief economist at Polyconomics in Morristown, N.J., a supply-side economics consulting firm. “The overall debt is still trivial compared to the (gross national product). What’s important is whether investors remain confident in the U.S. economy, and the markets seem to be indicating that they are.”
Contrary to widespread belief, the rise in overall foreign debt does not mean that the United States is liquidating investments abroad that have been built up over decades, the figures show.
Instead, it reflects the fact that investment in the United States by foreigners has been rising much faster than Americans have been investing abroad. Foreign assets in the United States increased by $270.2 billion in 1986, according to government estimates, while U.S. assets overseas rose by $118.5 billion.
The unprecedented accumulation of U.S. currency overseas because of the increased purchase of imported goods by Americans has left foreigners little choice but to recycle their dollars back into the United States. By contrast, the pace at which Americans have been investing abroad has slackened, largely as a result of the collapse of bank lending to Latin America, which is mired in debts it is unable to pay.
Back to the 1800s
Some economists expressed concern that the nation is returning to a position similar to that in the late 19th Century, when the United States was a net debtor and panics triggered by British investors caused several sharp, severe recessions.
“The great financial crises of the 19th Century were all tied up in interruptions of the flow of British capital to this country,” said David Hale, chief economist of Kemper Financial Services in Chicago. “President Reagan’s policies have taken us back to a time when American financial markets have more in common with the world of 1887” than today’s world.
But other analysts contend that the United States has experienced the rising influx of foreign capital because it is now considered one of the best places in the world to invest.
“Countries are net debtors if their investment opportunities exceed their wealth and are creditors if their wealth exceeds their investment opportunities,” economist Jurg Niehans argued in a recent book on international monetary economics. “It may well be, therefore, that a wealthy country, since its investment opportunities are particularly favorable, turns out to be a net borrower.”
Indeed, much of the increase in foreign investment last year reflected a rise in purchases of corporate stocks and bonds rather than foreign purchases of government debt.
Foreign holdings of corporate bonds increased by a record $59.6 billion, and foreigners gained strongly from the rising stock market, purchasing an estimated $17 billion in new shares while seeing the value of their existing stock market investments rise by $26.3 billion. In addition, other foreign business investment in the United States rose strongly, by $24.7 billion to $209.3 billion.
Meanwhile, foreign holdings of U.S. Treasury bonds and notes increased by $12.3 billion to $96 billion, with price appreciation accounting for one-third of the gain.
To help control the slide of the dollar, central banks of other major industrial nations purchased dollars in currency markets, accounting for most of the $38.3 billion rise in assets held by foreign governments.
