US net debt is likely to continue to grow rapidly – Commerzbank

The US current account is in deficit because the US economy constantly imports more than it exports. And because no one gives the Americans these goods for free, the US liabilities to foreigners grow faster than the US claims on foreigners, i.e. The US capital account shows a surplus of capital imports over capital exports. In other words, the net debt of the US economy to the rest of the world is growing because the current account is in deficit, Commerzbank’s Head of FX & EM Research Ulrich Leuchtmann notes.

US debt is growing much faster than US claims

“If that were the whole story, we could sit back and hope that the restrictive trade policy of the incoming US administration would solve the problem. But it isn't like that. Not at all. The world is not as simple as we were told in the lecture ‘External Economic Theory I’. In the figure above, you can see the net foreign asset position of the USA. Since 1988, the last year it was not yet in deficit. And you can see the cumulative net capital imports of the USA. Since 2003 at the latest, the two lines have had nothing to do with each other.”

“Why not? Because since 2010, but especially since 2017, it is not the surplus of capital imports over capital exports in the US that is causing US liabilities to grow faster than US claims. More and more, it is the high capital gains on claims on the US economy. In other words, because US investment by foreigners is highly profitable, US debt is growing so much faster than US claims. And that in turn means that because the business-friendly policies of the incoming US administration are likely to further boost the returns on foreign investment in the US, the net debt of the US economy is likely to continue to grow rapidly.”

“The next data from the Bureau of Economic Analysis will be released ‘between the years’: on December 27. Another figure that is regularly ignored by the currency market. Although it may ultimately decide the US dollar valuation. Why? If the rest of the world no longer wanted to hold claims on the US economy, their price in the rest of the world would fall. The easiest and quickest way to do that would be for the dollar to depreciate.”