When Will the United States Grow Out of Its Foreign Debt?- Economic Review, Third Quarter 1992 - FRB Dallas

One of the most provocative developments in the u.s. economy during the 191)0s was the rapid increase in net foreign claims on U.S. assets, \vith its counterpart in a large domestic trade deficit. To som(:" observers. the heightened pace of foreign acquisition of u.s. assets was clear evidence of an improved investment climate and so should be regarded as a sign of strength To others, however, the foreign capital intlows were the result of a broad-based consumptipn binge. By drawing dO\vn wealth to support present spending levels. u.s. residents were compromising their future living standards. In an article in the September 191)9 issue of t:col1omic Reuiell', I argued that a substantial portion of the foreign capital inflows could be explained by U.S demographics. During the 191)0s, the baby boom generation created large inv(:"stment demands, yet off(:"red little saving to finance them. This behavior was norma!. given th(:" age of the cohort, however, and so the resulting foreign capital inflows held little significance for future U S living standards, one way or the other. As members of the baby boom aged, saving would rise. domestic investment would drop, and the United States would switch from being an importer to a net exporter of capital. My calculations showed th~1t projected shifts in the age distribution of U.S. households were significant enough to raise net capital outflows to 3 percent of gross national product (GNP) by the year 2010. A principal assumption in my earlier analysis was that rising U.S. capital outflmvs could be absorbed by the rest of the world without a decline in interest rates In this article, I consider the reasonableness of this assumption and re-