This paper presents a detailed framework and analysis to address whether the US is on track to becoming a society of "sharecroppers," paying a large and growing share of income to foreign owners of US assets, or rather is more likely to continue as a society of "shrewd capitalists" with the cost of servicing international debt remaining relatively low and manageable despite growing international debt. Various scenarios illustrate the reliability of the modeling framework and show how alternative future paths for key variables affect the outcomes. The relationships determining the international flows and relative debt levels-including relative rates of return, asset portfolio compositions, valuation effects, and the outlook for an improving US trade position-indicate that a manageable and sustainable outlook is more likely than often considered to be the case. Results also show, however, the extent to which the outlook is vulnerable to the loss of "exorbitant privilege." Copyright � 2007 The Author; Journal compilation � 2007 Blackwell Publishing Ltd.

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ABSTRACT:This paper examines the potential role for foreign official holdings of U.S. Treasury securities and the associated implications for Treasury security interest rates, international portfolio allocations, net international income flows, and the U.S. net international debt position, using a baseline outlook of current and projected U.S. budget deficits and growing debt. The analysis applies empirical results regarding the role of U.S. structural budget deficits and foreign official holdings of U.S. Treasuries in determining Treasury security interest rates. Although initial review of information suggests that the world portfolio could potentially accommodate financing requirements over the intermediate horizon, substantial uncertainty remains about the relationships among foreign official holdings, exchange rates, and trade; the potential effects of "crowding out" in the international portfolio; and how and whether world portfolio allocations would adjust to accommodate higher shares of U.S. assets.