Sharecroppers or Shrewd Capitalists? Projections of the US Current Account, International Income Flows, and Net International Debt

Abstract

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.

Global imbalances: The new economy, the dark matter, the savvy investor, and the standard analysis

“…Kitchen (2006) shows that, abstracting from recession and near-recession years, this differential averages more than 5 per cent. 19 (In contrast, the differential for other private investments is quite small.)…”

“…Kitchen (2006) lays out the scenario in which historical rate of return relationships continue to hold and the U.S. also continues to enjoy the same tendency for its foreign investments to appreciate in value, while foreigners suffer capital losses on their more poorly chosen investments in the United States. 18 He shows that in this case it will cost the United States less than one per cent of GDP to finance a net external debt of 50 per cent of GDP.…”

“…external position was sustainable -because U.S. foreign investments earn a significantly higher return than foreign investments in the United States (Kitchen 2006 apotheosis of this view was the assertion that statistics are misleading and the U.S. deficit is not, in fact, a deficit at all. That as late as 2005 America was officially receiving net interest income from abroad meant that the country still had more foreign assets than liabilities, implying the existence of significant un-or under-recorded U.S. exports of goods and services (Hausmann and Sturzenegger 2005).…”

Financing U.S. Debt: Is There Enough Money in the World - and at What Cost?

“…In this section, we examine the outlook for international debt and net income flows using historical rates of return and assumptions regarding portfolio allocations, in a manner consistent with relationships regarding the trajectory of rates of return and debt as described in Kitchen (2007). 21 The exercise does not produce a forecast per se, but rather a projection that is consistent with other projections and assumptions.…”

“…Mann (1999), Roubini and Setser (2004), Cline (2005), Higgins, Klitgaard, and Tille (2005), Eichengreen (2006), andKitchen (2007) are among those who have examined the challenging outlook for U.S. international trade and financial imbalances, and the varying views as to whether the outlook is sustainable or manageable. In this paper, we focus on particular aspects of the relationship between budget deficits and the current account.…”