Update on US net international position

In a previous (long) post, we tried to evaluate the risk of default of the US.  At the time (end 07, the beginning of the crisis) the net international position of the US, evaluated at replacement value, represented about -13% of the GDP. We had noted that US holdings abroad were, at the time, earning an average 4,5% while foreigners were earning only 3,7%. The result was a small profit in favor of the US investors.

In a way the US behaves like a highly leveraged investor, borrowing ‘cheap’ dollars, and investing them with profit. This of course comes with a risk if the investments don’t behave well. This happened in 2008 : the net international position of the US is now about -37% of the GDP, a huge loss in just one year.

This does not change our evaluation, that the creditworthyness of the US ultimately depends much more on the commercial balance than the financial balance resulting from the net IIP (a order of magnitude lower), and if the commercial balance improves it would offset any change in the IIP. But this huge degradation of the IIP even BEFORE the massive new governement debt planned in 2009 is not going in the right direction, and another indicator that the US dollar must loose value, significantly, for both the IIP and the commercial balance to get back to more reasonnable numbers.

The question is, of course, if it will be a hard or a soft landing. I can still remember equivalent debates in 2006 on housing prices, which were clearly in a bubble, and whether they would do a soft landing. The dominant opinion was that it would be a soft landing. China is now buying anything foreign governements allow to convert US dollars into real goods, present (mines, gold, etc.) or future (oil contracts), but their 1,500 billions dollars are hard to spend, and they really just change hands, they don’t disappear as no one is now willing to risk lending long term to the US treasury.

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