International Balance of Payments – United States

Carbaugh (2009) mentions that during a recession, both saving and investment tend to fall within an affected country. The United States United States was able to recover its economy rapidly by mortgaging part of its wealth to foreigners during its recession of the early 1980s: its political stability and relatively high interest rates attracted investors from other countries to invest their funds in the United States. These funds were more than what the United States residents invested abroad. However, after World War I (1987), the United States had, for the first time incurred $23 billion and become a debtor nation.

Thereafter, the United States continued to be a net international debtor, with United States investments overseas continue to fall due to a sluggish loan demand in Europe: the reduction of the overseas investment by commercial banks due to solving the repayments of debt in the Latin American countries, and drop in the oil-importing developing nations’ credit demands due to the declining oil prices. Since the funds received by the United States from foreign investors is much more than its own foreign investments (in other countries), coupled with the United States paying lower interest rates to these foreign investors, it was able to become a net recipient of interest payments.

The second period was during the last 20 years, when the United States increased its debts from other countries, resulting in the United States having to pay larger interests and principal to foreign lenders; increasing United States debt servicing costs. However, there had always been surplus of the United States residents’ income from their foreign investments over foreigners’ income from their larger home investments; surpluses ranging between $20-30 billion.

The reason for this occurrence is that United States companies give higher returns even though such returns entail United States companies taking on higher risks, such as the economic and political instability in these countries. The foreign investors, on the other hand, bought United States assets which have lower risk and thus offer lower returns as the United States is more politically and economically stable.

The United States is able to earn higher rates of its wealth than it pays on its debt due to the perceived financial stability which International lenders favor United States borrowers, thus at a lower rate. Dividend rates on equities are lower and capital gains on external investments are routinely higher than capital losses on external debt, even accounting for the exchange rate changes. Conversely United States lenders are able to earn higher returns internationally. As a result, the United States does not have to bear negative debt service cost, and its current account deficit is less burdensome. Therefore, United States, despite having a large external debt, enjoys being a net recipient of interest payments.

References:

• Carbaugh, R J, 2009, International economics, 12th edn, South-Western Cengage Learning, USA