Soon, US may owe more to foreigners than they owe US
Boston — The United States could become a net debtor nation as early as 1987, joining the ranks of nations like Brazil and Mexico in owing foreigners more than foreigners owe the US and its residents.
That's a warning made by David Hale, chief economist of Kemper Financial Services in Chicago. And Martin S. Feldstein, chairman of President Reagan's Council of Economic Advisers, agrees it is ''likely.'' Indeed, a study by one of his staff indicates that the US balance sheet could be in the red as soon as 1985.
Should this happen, it would be the first time since 1917 that American liabilities to foreigners have exceeded US foreign assets. As a general rule, developing countries borrow money abroad to finance railways, highways, dams, new industries, and other projects.
When the nation reaches greater economic maturity, it will repay at least some of those debts and invest more abroad, becoming a creditor nation. Revenues from a large chunk of the exports from a debtor nation may be needed not to pay for imports, but to pay interest and principal on its foreign debts.
As a young nation, the US operated in the red until it helped finance its European allies in World War I. Now, because of massive balance-of-payments deficits, it could again become a net debtor.
''This being a capital-rich country, it would be more natural for us to be lending abroad on a net basis,'' notes Robert E. Lipsey, a professor of economics at the City University of New York. The change to a net debtor ''seems inappropriate for our stage of development,'' he says.
There's a big ''if'' attached to Mr. Hale's warning - that the US current account deficit in its international payments stays in the $50 billion to $60 billion range through 1987.
Though final numbers are not in yet, it is estimated that the US had a current account deficit in 1983 of about $40 billion. In other words, the US paid some $40 billion more for its imports, foreign travel, servicing of foreign debt, shipping charges, and so on, than it earned from exports, overseas investments, travel and tourism in the US by foreigners, payments received on loans abroad, shipping charges, etc.
This year, some experts have been guessing at a $70 billion current account deficit - the largest ever. Indeed, some staff members on the Council of Economic Advisers have estimated the deficit could be $100 billion.
One basic reason for this red ink is the strength of the US dollar. It makes it more expensive for foreigners to buy American goods; and relatively cheap for Americans to buy imports. Thus there are some predictions that the US could suffer a trade deficit - imports of goods and services exceeding exports - of a massive $100 billion. The more embrasive current account deficit would be smaller, largely because of earnings from American-owned assets abroad, such as branches of multinational companies in Europe and Southeast Asia.
One of several factors in the dollar's strength is the current high interest rates in the US. And one factor behind those rates is the large deficit in the federal government's budget, requiring massive borrowing from both Americans and foreigners.
Just as the federal budget deficit must be financed, so must the current account deficit. This can be done through some form of borrowing abroad, or by selling off American foreign assets.
Such borrowing reduces the net international investment position of the US. At the end of 1982 (the latest statistics available), the nation had $834 billion of assets abroad. Foreign assets in the US amounted to $666 billion. So the US was in the black by $168 billion, up $12.2 billion from 1981.
That 1982 increase in the US net international position compared with a $35.8 billion rise the year before, and was the smallest since 1978, according to Russell B. Scholl, an economist with the US Commerce Department's Bureau of Economic Analysis (BEA).
The numbers for 1983 won't be available for another six months or so. But it could be that with last year's large current account deficit the US net position deteriorated.
Kemper's Mr. Hale assumes that such deficits will wipe out the favorable net international position of the US in the next few years, making it a debtor nation.
BEA experts see this as theoretically possible. Alternatively, the US dollar could drop in value, gradually improving the balance of trade and reducing or eliminating the current account deficit.
The pickup in the economies of West European nations, Japan, and other countries will also tend to boost demand for US goods.
''The problem may be already correcting itself,'' notes Mr. Hale.
If the current account deficit does continue, the US will be piling up international debts that likely will have to paid off by the nation at some point in the future, perhaps by the next generation.
There are many factors in the US balance sheet. An important one is direct investment in plant and equipment. In 1982, the US owned $221 billion in direct investments in other countries; foreigners owned $101 billion of such investments in the US. In recent years, foreign direct investment in the US has been growing faster than vice versa.
Another element is portfolio securities, such as stocks and bonds. The US owned $75 billion of these foreign securities in 1982; foreigners owned $93 billion.
A third aspect is official asset ownership. The US owned $34 billion of such official reserves as gold, special drawing rights, and foreign currencies, and $ 74 billion of other assets (Export-Import Bank loans, Commodity Credit Corporation loans, military support assistance, and so on). Foreign official assets total $189 billion, of which US government securities amount to $133 billion.
James Fralick, senior economist with Morgan Stanley & Co., a New York investment banking house, is troubled by the growth in foreign financing of the US budget deficit. ''If present policies remain unchanged,'' he says, ''foreign holdings of federal debt alone will rise to an estimated $275 billion by 1989, up sharply from $126 billion in 1980 and only $14 billion in 1970.''
The US Treasury paid $18 billion in interest to foreigners in fiscal 1983, and Morgan Stanley estimates this burden could rise to around $30 billion in the latter part of the 1980s. Foreign funding of the deficit, Mr. Fralick says, is ''by no means an unalloyed blessing.''
If the US becomes a net debtor nation, the value of the dollar as an asset other nations hold in their international reserves may come into question. ''It could be hard to hold onto this unique (reserve currency) role,'' says Kemper's Mr. Hale.
US international investment position (Year end 1982; in billions of dollars) What the US owns (assets abroad) US official reserve assets - $34 (gold, special drawing rights, reserve positions in International Monetary Fund, foreign currencies) Other US government assets - $74 (such as Export-Import Bank loans, Commodity Credit Corportation loans, Military Support Assistance loans) US private assets - $726m Of which:
Direct investment $221 (plant and equipment abroad)
Foreign securities $75 (stocks and bonds)
US claims on unaffiliated foreigners reported by US nonbanking concerns $28 (e.g. US insurance companies which buy mortgages in Canada)
US claims reported by US banks $402m (such as developing country debts and others) Total US assets abroad - $834m
What foreigners own of US assets Foreign government assets in the US - $190 (69.8 percent of which are US government securities) Direct investment in the US - $101 US securities - $93 (stocks and bonds) US liabilities to unaffiliated foreigners - $26 (reported by nonbanking concerns) (such as US corporate borrowings in Eurodollar market.) US Treasury securities and other liabilities - $256m (reported by US banks) (such as deposits by foreigners in US-based banks) Total foreign assets in US - $666m
Positive international investment position of US - $168m m