The mystery of the missing $2.9 trillion

Like most people, economists love a mystery – especially if it involves not a missing person but a missing $2.9 trillion in United States debt.

That's $2.9 with 11 zeros after it.

Some words of explanation: Every quarter the Department of Commerce comes up with the US "International Investment Position." At the end of 2006, for instance, the US had a net negative position – by this measurement of international assets and liabilities – of $2.6 trillion. In other words, the country is by far the world's biggest debtor nation.

A quarter century ago, the US was the world's largest creditor nation.

The economists at Commerce count American-owned private assets in foreign nations (plants, equipment, retail outfits, property, corporate stocks and bonds, etc.), US official international reserves (gold, special drawing rights, foreign currencies), and other US assets abroad. The measurements get complicated. Then these economists count what foreigners own of American assets, looking at the same list of assets.

Subtracting the value of American international assets from what foreigners own of American assets, they come up with how much Americans are in debt to other nations and their peoples.

But if you look at the current account of the US balance of payments, which measures primarily the balance of trade, and also flows of interest and dividends, foreign aid, and other international transfers, the US should be far deeper in hock – $2.9 trillion more over the years from 1990 through 2006 than the official $2.6 trillion. Every month, the Commerce Department has reported huge deficits in trade and the broader current account. These deficits have to be financed somehow by foreigners, and so the US should be piling up its international debts in grand style.

Last year the US international deficit was running at a level equivalent to 6.5 percent of our gross domestic product, the nation's total output of goods and services. In a sense, Americans were living 6.5 percent better than they would if they weren't putting on the national tab, in effect, so many toys, shirts, computers, etc.

"Why aren't we more indebted?" asks Barry Bosworth, an economist at the Brookings Institution in Washington.

One related mystery is that American investments in foreign nations earn a much higher rate of return than do the investments by foreigners in the US.

"Why?" asks Mr. Bosworth in a working paper written with Susan Collins of the Gerald Ford School of Public Policy in Ann Arbor, Mich., and a graduate student, Gabriel Chodorow-Reich.

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