Why did the United States Evolve from the Largest International Creditor in 1980 to the Largest International Debtor in 1990?

Posted on May 16, 2021 by Florian Buschek

… from Robert Aliber.

Remarkable transformation of the U.S. international investment position occurred over the last 40 years. U.S. net foreign assets were larger than combined net foreign assets of all other creditors. By 1990, foreign-owned U.S. securities and real assets were larger than U.S. owned foreign securities and assets. This change occurred without the U.S. Treasury borrowing in foreign currency and few U.S. firms borrowing, reflecting a surge in foreign purchases of U.S. securities. Inferences from the currency composition of portfolio changes of those who acquired U.S. dollar securities suggest that foreign savers took the initiative on cross-border investment inflows. The U.S. could not have developed a larger capital account surplus after 1980 unless a similar increase in the U.S. current account deficit occurred. The primary factor that led to the U.S. current account deficit increase was the surge in U.S. stocks and other asset prices, resulting in a U.S. household wealth surge and consumption boom. The foreign saving inflow displaced domestic saving. In addition, an increase in the price of the U.S. dollar led to expenditure-switching from U.S. goods to increasingly less expensive foreign goods. When investor demand for U.S. dollar securities declined, the U.S. dollar price fell in 1992, 2002, and 2020 and the price of U.S. dollar securities declined. The paper discusses the source of the change in the U.S. international investment position, the flow of foreign saving to the U.S., cyclical variability in the foreign saving flow to the U.S., and the potential impact of an adjustable parity arrangement.

Common thinking is that current account surpluses and building reserves are good (looking at you Europe and especially Germany). But that means someone else must run a current account deficit (capital account surplus). That someone is usually the US with its deep and liquid capital markets. Over time this leads to distortions in the global economy and is ultimately not sustainable. The essay makes the case that indeed it was capital flowing into the US that caused the current account deficit instead of the other way round. I happen to agree with this view just as I think that it was capital flowing into Spain for example that caused the housing boom, massive debt and current account deficits, instead of the Spanish consuming too much.

These balance of payments issues are extremely complex. As the worldwide system is closed and needs to add up we see unintuitive things happening. Nobody “forced” the US consumer to consume more. But the balance of payments needs to balance and there are levers that are doing that in aggregate, independent of individual decisions. Why cannot export every country itself to success? Well, because someone need to import. Why cannot every country build net (foreign exchange) reserves? Because it is by definition the debt of another country. Thinking in systems is not intuitive but required.

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