10-If you go to the BEA website (http://www.bea.gov) and look at the Survey of C

Question

10-If you go to the BEA website (http://www.bea.gov) and look at the Survey of Current Business for July 2010, the table on

If you go to the BEA website (http://www.bea.gov) and look at the Survey of Current Business for July 2010, the table on "U.S. International Transactions," you will find that in 2009, U.S. income receipts on its foreign assets were $585.2 billion (line 13), while the country's payments on liabilities to foreigners were $456.0 billion (line 30). Yet we saw in this chapter that the United States is a substantial net debtor to foreign- ers. How, then, is it possible that the United States received more foreign asset income than it paid out?

Explanation / Answer

You are mixing up several different kinds of assets, which causes problems when the rates of return are very different.

(1) financial assets - The U.S. owes more money to foreigners than foreigners do to the U.S. If interest rates were the same, then you'd expect the U.S. to pay more interest as a result. But, of course, interest rates are not the same. In general, the rates foreigners earn on their U.S. investments are lower than Americans earn on investments abroad. One factor is that many foreigners are investing in U.S. Treasuries, with very low interest rates.

(2) foreign direct investment - Other countries invest in the U.S. while the U.S. invests in other countries. The BEA hasn't published recent data but the U.S. has been investing longer so the U.S. owns more foreign non-financial assets than foreigners do in the U.S.

In terms of new asset investment, it seems to be about even

In any case returns on investment of physical assets may be very different from return on financial assets. In particular, returns on Treasury notes are very low, even in the U.S. compared with investments in manufacturing, etc.

(Note that when some other country is holding U.S. dollars it can choose to:

1. Buy a U.S. financial asset
2. Make a direct investment in the U.S.
3. Buy a U.S. export
4. Sit on it.)

(3) What does turn out to be interesting is that historically, U.S. companies have had greater return on their foreign direct investments than foreigners have had investing in the U.S.


And more generally, there are other financial advantages to being American and using the dollar


This article notes that one factor is that while the U.S. has a floating exchange-rate regime, because it the the premier currency, it actually has a fixed currency - the dollar does not respond to trade deficits, etc. as would a true floating currency

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