How foreigners will buy the U.S.May 18, 2011: 6:44 AM ET
Think we're in hock up to our eyeballs now? Wait till 2025.
That's the message behind a World Bank report this week that imagines what the global economy will look like in a decade and a half. It is, to be blunt, a world in which Americans have sold everything that isn't nailed down to finance our fabulous lifestyles.
Yes, the United States will still have the biggest economy, and the dollar is likely to continue to play a prominent if probably reduced reserve-currency role. But Americans will find themselves paying for those exorbitant privileges, and how.
The World Bank projects that while the U.S. economy will expand by perhaps 40% in constant dollar terms, net foreign ownership of U.S. assets – stocks, bonds and property in the hands mostly of China and other emerging Asian countries -- will expand fivefold. This is the ownership society, though with others doing the owning.
The U.S. net international investment position – which compares the value of foreign-owned U.S. assets with the value of U.S.-owned foreign assets -- will hit a staggering minus-69% of annual gross domestic product by 2025, in the World Bank scenario. That compares with minus-18% now.
If you accept the World Bank's view, by 2025 the rest of the world will own something on the order of $13 trillion more of U.S. assets than we own of theirs. China alone will hold an $8 trillion investment surplus against the rest of the world, mostly the United States.
Those sums dwarf the deficits the United States has run up even in its past two decades of profligacy. It had a $2.7 trillion (see chart, right) negative international investment position as of 2009, the last date for which figures are available. If anything that understates the degree to which America has been living on borrowed money: U.S. current account deficits over the past two decades add up to almost $7 trillion, but we made much of that back on valuation changes (thanks to factors such as an ever-weakening dollar).
It wasn't too long ago that a mere $2 trillion or so in net foreign ownership of U.S. assets was viewed as something to fret over. Warren Buffett did so in the pages of Fortune in November 2003, at a time when the trade deficit was just starting to blow out and the dollar was on the verge of paying the price.
He compared the U.S. practice of running 12-digit trade deficits for the purpose of financing domestic consumption to "an extraordinarily rich family that possesses an immense farm. In order to consume 4% more than we produce — that's the trade deficit — we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own."
Buffett made that point in the service of arguing for a policy to limit imports and encourage exports. Congress, predictably, did nothing. Since then, the trade-weighted dollar index has dropped 20% and imports have risen by half. Coincidence?
No one has any earthly idea what the global economy is going to look like in 2025, of course. But it's easy to see why predicting more dollar depreciation and U.S. irresponsibility is not a very hard sale nowadays.