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In dollar terms, the United States is the world’s most indebted country, with a net international investment position – the difference between US residents’ foreign financial assets and liabilities – increasing to –$16.75 trillion in the first quarter of 2023, according to the Bureau of Economic Analysis. If the US were subject to the same constraints as a household or business, this would be terribly alarming – and indeed, charts are frequently shared on Twitter and other social media sites purporting to show the imminent collapse of the economy as debt levels reach a tipping point (another, particularly confused one, went viral this weekend).

No one imagines that the accumulation of debt is sustainable at current levels of growth. Legal and tax systems in the US encourage lending to individuals, prioritize corporate debt issuance over investment, and incentivize politicians who bribe voters by cutting taxes and increasing spending* – with much of this funded by foreign investors. Debt is rising too quickly relative to the size of the economy, and “crowding out” effects are likely to weigh on long-term productivity.

But exchange rates play a major role in determining the level of international indebtedness. Because most of the country’s liabilities are denominated in dollars and most of its assets are functionally in foreign currencies, a fall in the greenback’s value can add trillions of dollars to the asset side of the balance sheet while subtracting from the liability side. If the world were to suddenly panic about the United States’ repayment capacity, these valuation effects would go a long way toward resolving the imbalance.

Further, because the United States’ assets are overwhelmingly composed of high-return equity and direct investments while its liabilities are more heavily focused on low-yielding debt instruments, the country generates a primary capital income surplus – making it the mirror image of the typical debtor. To some extent, the US acts like an enormous bank or hedge fund, borrowing cheaply from the world, investing the proceeds at higher returns, and pocketing the spread.

For now, the level of international indebtedness doesn’t represent an apocalyptic threat to the United States. It does, however, suggest that the global economy remains seriously unbalanced. As long as a significant share of the world’s investors believe its better to send capital to the US than to invest at home, their home countries will suffer poor competitiveness, and the American political and financial systems will become ever more detached from economic laws of gravity.

*We note that Warren Buffett has proposed a simple solution: “I can fix the $32 trillion US debt problem in 5 minutes. You pass a law that when there’s a deficit of more than 3 percent of GDP, all sitting members of Congress are ineligible for re-election.”

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