Because the United States has been importing more goods and services for the past three years than it has been able to export, it has become an international debtor nation for the first time in 65 years.
Just what does that mean, and how serious is it? Is the United States in the same league as debtor nations such as Mexico and Brazil? Is it inappropriate for the world's richest country to become a net debtor? Does this status increase the risk of a dollar collapse?
The definition of debtor status is relatively simple: It occurs when American assets owned abroad are less than foreign assets held here, and that appears to have happened during the first quarter of this year. There is nearly $1 trillion on each side of the ledger, including everything from factories to overnight bank balances.
But there is a problem in getting a precise picture of what is going on, because of discrepancies in statistics and because the value of direct investments (such as plants and physical facilities) is carried in Commerce Department data at book value, not reflecting today's inflated replacement costs. Nevertheless, huge current account deficits (in trade and services) in 1983 and 1984 -- and projections -- make it clear that the United States is becoming a large debtor nation.
How meaningful is that?
Federal Reserve Chairman Paul A. Volcker told a Senate Banking Committee last year that "being a net debtor is not a crisis. What's damaging is the suggestion that it's not sustainable."
In testimony Friday, Fed Governor Henry Wallich said: ". . . the budgetary and trade deficits of the magnitude we are running . . . imply a dependence on foreign borrowing that, left unchecked, will sooner or later undermine the confidence in our economy essential to a strong currency and prospects for lower interest rates."
Implicit in these assessments is the belief that the foreign borrowing is financing a consumer boom at an unsustainable level. As a consequence, Americans will have to accept a lower standard of living in the future by transferring real resources abroad to help pay off our foreign obligations, Volcker and Wallich say.
No one will say just when these terrible things will happen. For a time, the massive inflow of foreign capital is likely to assure a flourishing economy. But the Congressional Budget Office said "Americans would be borrowing from future generations through the government deficit, and through the export deficit as well."
Eventually, foreigners would cut back sensibly on the amount of dollar assets they want to hold -- and that's when the trouble would begin: "As capital inflows slowed, or ceased entirely, domestic interest rates could rise, perhaps sharply, and growth in the federal debt could become explosive," according to the CBO.
Economist C. Fred Bergsten dramatically labeled all of this "The Second Debt Crisis" in a speech in London last month. His scary scenario suggested that the portion of the U.S. debt owed to foreigners could exceed $1 trillion by 1990. In a later interview, he suggested that Japan could become a creditor nation by that time to the tune of $500 billion. "So Japan is going to wind up owning a lot of the world -- much more than we ever did," Bergsten said.
Some others reject the parallelism with Third World nations. In a research paper, Shafiqul Islam of the Federal Reserve Bank of New York (expressing his personal view) points out that the United States is a rich and productive economy in which even large debt numbers would be only a fraction of gross national product.
Moreover, because the United States can pay for this country's foreign purchases with its domestic currency -- the dollar -- "simple comparisons of the United States with other countries in terms of various . . . summary ratios of 'debt' are virtually meaningless." Islam wouldn't worry about a $236 billion external debt next year, but he agrees it can't go on forever.
Indeed, it is the long-run buildup of the debt that focuses all anxieties about the U.S. economy and the dollar. How long will foreign investors be willing to acquire assets here? If current trends are not reversed soon, "The United States may soon find itself in a position where it would have to earn a surplus in the trade balance in order to cover a deficit on investment income," Wallich said. "The longer the situation continues, the more the value of the dollar would have to fall in the long run to generate such a trade surplus."