Filling Up on Foreign Debts

Americans can thank overseas lenders for low interest rates

The United States is a big spender internationally.

For years, Americans have bought more French cheese, Venezuelan oil, and other foreign goods than they've been selling in the way of corn, machines, and other exports. To pay foreigners for this trade deficit, the US has been borrowing money.

As a result, the world's richest nation has become the world's biggest debtor nation.

And new statistics show that what economists term its "international investment position" slipped another $194 billion into the red last year to reach a negative $831 billion in total. That rapid growth rate puts US financial markets in a somewhat delicate position.

Like the $4 trillion in domestic federal debt held by the public, the international debt is probably of no immediate threat to the economy. Nonetheless, it is something economists keep an eye on because of its influence on interest rates and perhaps even the stock market.

"America has become increasingly reliant on the good graces of Asian investors to keep interest rates low," writes Stephen Roach, chief economist at Morgan Stanley Dean Witter in New York. The inflow underpins "the valuation of a rather frothy US stock market."

"The amount of foreign monies supporting the US debt market is astonishing," says Michael Cosgrove, editor of the Econoclast Advisory Service in Dallas.

What if it slacks off? he asks.

In June, the mere threat of this sent stock and bond prices plunging. Japanese Prime Minister Ryutaro Hashimoto was interpreted - inaccurately, according to Japanese officials - as saying that Tokyo might pull some of its money out of US capital markets.

The inflow of foreign money has helped keep interest rates down, making up for a low national savings rate. If it drops off, interest rates could rise, hitting those buying a house or car with borrowed money.

And rising rates could send stock market prices plunging.

Last year, foreigners pumped in an amount equal to more than half of the all business, household, and government credit needs - from car loans to municipal bonds to business borrowing.

Foreign money has helped finance the business investment boom in the US. This money hikes productivity, provides jobs.

On one hand, the inflow reflects the attractiveness of the US for foreign investors.

"The United States is an island of prosperity in the world," says Scott Pardee, a senior adviser to Yamaichi International (America), a Japanese-owned investment bank in New York.

On the other hand, it makes US financial markets vulnerable to a sudden outflow of foreign funds.

"Should some event occur, these fund inflows could be quickly reversed," Mr. Cosgrove says. That's particularly true for more than $1 trillion of Treasury securities bought by foreigners.

Such an event - say an oil crisis or a Gulf War-type action - would depress bond prices, force up interest rates, and clobber stock prices, he warns.

The first impact of the recent currency crisis in Asia has been a flow of funds into dollar-denominated assets as a haven. But Mr. Roach worries this inflow might dry up as these countries shore up troubled financial institutions.

Japan, Singapore, China, Taiwan, and Hong Kong have accounted for fully 40 percent of the phenomenal growth in total foreign holdings of US Treasury securities since the end of 1994, he estimates.

Mr. Pardee, however, maintains that as long as the US maintains "reasonable" fiscal and monetary policies, foreigners will be glad to keep money in the US. Fiscal policy involves levels of government taxes and spending.

The US international balance sheet is the national equivalent of an individual's balance of assets (say a house, bank balance, and mutual fund investment) and debts (perhaps a mortgage and credit-card balance).

The US, including its government, corporations, and individuals, own $4.3 trillion in assets abroad, while its liabilities total $5.1 trillion in foreign-owned factories, stocks, bonds (more than $1 trillion in Treasuries), and the like within America.

On both sides of the balance sheet is a mix of debts and assets. Thus government experts avoid the popular but inexact "debtor nation" phrase.

But as long as the US racks up a substantial deficit in its balance of trade, it is likely to keep moving into the red in its balance of assets and liabilities. That's because the surplus dollars piled up by foreigners need to be invested directly or indirectly in US assets.