Global Policy Forum

By Michael M. Phillips

The U.S. has racked up $2.69 trillion in net debt to the rest of the world, a record run of charges on the national credit card. As of the end of last year, Americans held overseas stocks, bonds, factories and other assets totaling $10.01 trillion, while foreigners held $12.70 trillion in American assets, the Commerce Department reported yesterday. The difference -- the net U.S. debt -- was up 14% from $2.36 trillion at the end of the previous year.

Last year was the 20th straight year in which the U.S. came out a net debtor, when the value of direct investments -- such as factories and offices -- are measured by their current or replacement costs. A slightly different method -- in which direct investments are valued by their stock prices -- yields a net U.S. debt of $2.55 trillion, up from $2.45 trillion at the end of 2004. By that measure, 1988 was the last year the U.S. was a net creditor nation.

In a sense, the U.S. is like a consumer with a platinum card. Big bills aren't a problem as long as there is enough income to service them. For a consumer, that means a reliable and sufficient paycheck. For a country, that means economic growth that is fast enough to generate the returns foreigners seek when they lend it money or buy companies, an act that is essentially a claim on future U.S. production.

Problems arise if growth in the U.S. slows relative to other countries and foreigners then look elsewhere for returns. "The way to think of that is if your income growth slows down, the creditors are going to stop lending to you and demand repayment," said Andrew Bernard, professor of international economics at the Tuck School of Business at Dartmouth College.

If that happens, the worst-case scenario is that interest rates will surge in the U.S., the dollar will weaken and the economy will contract. "The key for the United States is if our [economic] growth rate and productivity growth rate slow down, we'll have large repayment obligations," Prof. Bernard said.

The Organization for Economic Cooperation and Development reported this week that the U.K. last year surpassed the U.S. as the world's largest recipient of direct investment. The U.K. drew in $164.5 billion in direct investment, compared with the $109.8 billion that went to the U.S. in the No. 2 spot.

Generally, foreigners still apparently consider the U.S. a good credit risk, and the darkest scenarios still seem to be somewhere over the horizon. Indeed, a major source of the increased U.S. indebtedness last year was a surge in foreign purchases of U.S. Treasury securities, according to the Commerce Department. And, while the country's net indebtedness hit a record, the economy as a whole expanded, too. When the direct-investment component is measured by the market-valuation method, net national indebtedness increased at a slower pace than the overall economy expanded.

"Although the [debt] numbers are big, our capacity to service those obligations has increased as well, and so it's less of a threat," said Ted Truman, a former Treasury Department official now at the Institute for International Economics, a Washington think tank.

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