Tuesday, February 07, 2006

The Privilege of American Debt

The Privilege of American Debt: "One would expect that a country indebted to the rest of the world would have to pay interest on that debt. That is not the case: with the exception of the last trimester of 2005, the United States has always received more interest and dividends from the rest of the world than it has paid out. How is that possible? Net American debt is the difference between all foreigners' assets in the United States (the liability side of the US balance sheet) and American assets elsewhere in the world (the asset side of the balance sheet): the former represent about 12.5 trillion dollars, the latter 10 trillion, so a net debt of about 2.5 trillion dollars. But the assets and liabilities differ fundamentally. US liabilities are mostly Treasury Bills (often purchased by Central Banks) and loans from foreign banks. These loans are more and more short-term with low interest rates. On the asset side, the predominant categories are stocks holdings on foreign exchanges and direct investments by American multinationals. Riskier, those assets have higher rates of return. Therefore, Americans borrow at low cost to consume, but also to invest in higher risk and more profitable assets in the rest of the world. "


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