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Asymmetric investment returns and the sustainability of US external imbalances

Author

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  • Phil Garton

    (Treasury, Government of Australia)

Abstract
A little-remarked aspect of the widening of United States trade and current account deficits since the late 1990s has been their limited effect on United States net foreign liabilities and, especially, net income. This has been possible because the United States has enjoyed both higher yields and larger valuation gains on its foreign assets than on its foreign liabilities. The gain from this asymmetry in returns has increased over time as declining 'home bias' has increased the size of gross foreign asset and liability positions. This highlights a major shortcoming in the standard analysis of external sustainability, which assumes symmetric investment returns. While some of this advantage might be due to transitory factors or measurement error, most of it seems to be explained by structural factors. The United States is a relatively safe investment destination. Its foreign liabilities are mainly in the form of debt, while its assets are mainly equities, which tend to yield higher returns (including valuation gains). If the factors underpinning the United States comparative advantage as a provider of safe, liquid financial assets persist and declining 'home bias' continues apace, then the need for external adjustment might be less than conventional analysis suggests. That said, future outcomes are subject to considerable uncertainty, as an increasingly-leveraged external balance sheet means that the United States is also more exposed to risk.

Suggested Citation

  • Phil Garton, 2007. "Asymmetric investment returns and the sustainability of US external imbalances," Treasury Working Papers 2007-01, The Treasury, Australian Government, revised Feb 2007.
    • Handle: RePEc:tsy:wpaper:wpaper_tsy_wp_2007_1
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    File URL: http://www.treasury.gov.au/~/media/Treasury/Publications%20and%20Media/Publications/2007/Working%20Paper%202007%2001/Downloads/PDF/WP_US_external_sustainability.ashx
    File Function: First version, 2007
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    References listed on IDEAS

    as
    1. Maurice Obstfeld & Kenneth Rogoff, 2007. "The Unsustainable US Current Account Position Revisited," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 339-376, National Bureau of Economic Research, Inc.
    2. John Kitchen, 2007. "Sharecroppers or Shrewd Capitalists? Projections of the US Current Account, International Income Flows, and Net International Debt," Review of International Economics, Wiley Blackwell, vol. 15(5), pages 1036-1061, November.
    3. William R. Cline, 2005. "United States as a Debtor Nation, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 3993, April.
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    Cited by:

    1. Phil Garton, 2007. "Comparing the net foreign liability dynamics of Australia and the United States," Economic Roundup, The Treasury, Australian Government, issue 4, pages 101-117, December.

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    More about this item

    Keywords

    global imbalances; US current account; external sustainability;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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