The United States as a Global Financial Intermediary and Insurer

Abstract

T he press, politicians, and academics have focused attention on the large and sustained negative U.S. trade and current account imbalances since their inception in the 1970s. Much of this attention has cast blame on protectionist practices of foreign countries, especially Japan in the 1980s and China most recently. Two important considerations are often ignored: First, the counterpart of a deficit in the current account is a positive net capital inflow. That is, any country with a current account deficit must also be getting capital inflows to finance either domestic investments or consumption. Shutting down those inflows would require a reduction in domestic investments and consumption or possibly both. Second, and more interestingly, American investors can use capital inflows from the rest of the world to finance their own investments abroad. In other words, Americans can be investing in the rest of the world at the same time that foreigners are investing in the United States. This allows both sides to diversify their asset holdings. Over long periods, American investors have obtained rates of return from their foreign assets that exceed the rates of return on foreign holdings of U.S. assets. The first column of the table shows estimates from Gourinchas, Rey, and Govillot (2017), who find that from 1952 to 2015, American investors obtained a 5.8 percent rate of return on their foreign investments, while foreign investors obtained only 3.