Americans Owe Other Countries Far More Than They Owe Us—And It’s Getting Serious

Two former U.S. Treasury officials argue the historic gap may require a weaker dollar

U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chairwoman Janet Yellen, seen here at the March G-20 finance ministers meeting in Germany, may soon face dollar headaches as national borrowing hits record levels. Photo: Thomas Niedermueller/Getty Images

Unprecedented U.S. borrowing from other countries compared with what they borrow from the U.S. is fast approaching danger levels, former U.S. Treasury officials warn.

“Never in history has one country owed so much to the rest of the world,” says Joseph Gagnon, a senior fellow at the Peterson Institute of International Economics.

The U.S. is borrowing to finance America’s trade deficit, pushing the country deeper into the red.

Mr. Gagnon and Peterson colleague Fred Bergsten say the Trump administration may have to push down the value of the dollar to cut an expanding U.S. trade gap.

Foreign ownership of U.S. debt such as Treasury and corporate bonds outpaced American claims on foreigners by $8.4 trillion in the last quarter of the year, new data posted this week by the Bureau of Economic Analysis shows. That’s a deficit worth 45% of America’s gross domestic product.

It is projected to hit 53% by 2021, but could accelerate if the Trump administration cuts taxes and Congress expands the budget deficit.

It is also nearing a zone that few countries have survived unscathed.

No economies of even a modest size have had a borrowing deficit above 60% of GDP without a major reversal in their trade balance, “often accompanied by severe financial stress,” Gagnon says.

The data–officially called the net international investment position–can act as an indicator of excessive and unproductive borrowing in an economy.

Borrowing itself isn’t a problem, especially if a country has major commodity reserves sought by global buyers, such as Australia.

But an unhealthy portion of U.S. borrowing from abroad finances consumption instead of investment in new domestic production that can fuel economic expansion.

At some point, credit bubbles pop, which can trigger turmoil in housing, financial, labor and other markets.

Because the U.S. borrows entirely in its own currency—averting an exchange-rate mismatch that hurts many countries–it will likely avoid a worst-case scenario, Mr. Gagnon says.

But the U.S. and foreign economies still face serious adjustment costs, he warns, that only rise as a needed shrinking of the trade deficit is delayed.

He estimates that to stabilize the borrowing deficit at 50% would require halving the trade gap to 2% of GDP by 2020 from its current projected path towards 4%. Such a feat would require a 14% depreciation in the dollar, he says.

The Trump administration says it plans to cut deficits by negotiating better trade terms with other countries, including by using higher import tariffs and investment restrictions as leverage.

But raising trade barriers would likely be economically harmful and have little effect on the trade deficit, Mssrs. Gagnon and Bersten argue.

Instead, the U.S. should encourage an orderly decline in the foreign exchange value of the dollar, they say. Other countries may not initially be keen to join a coordinated intervention because it would mean their currencies would appreciate.

That’s why the U.S. may need to act unilaterally to get the process started, the Peterson economists say, replacing a decadeslong “strong dollar policy” with an “appropriate dollar” policy.

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