US Net investment income - can Poom really happen given this?

[Chomsky]

Very interesting blog post and subsequent column from Paul Krugman. First the blog (with my highlights):

December 31, 2011, 2:16 pm

US Net Investment Income

How’s that for a sexy blog post title? But this actually matters.

I’ve been arguing that the nature of US debt now is not, despite appearances, all that different from debt post-World War 2, when we pretty much entirely owed the money to ourselves. Now, of course, some of the money is owed to foreigners; but as I pointed out, America has large assets abroad, not too much less than its liabilities.
But wait, there’s more. American assets. often taking the form of foreign subsidiaries of US corporations, earn a higher rate of return than US liabilities — especially now, when there’s a lot of foreign money parked in Treasuries, but this was true even before the crisis. As a result, income from US-owned assets abroad — the blue line below — consistently exceeds payments on foreign-owned assets in the United States, the red line:




Again, if your image is that we’re deeply in hock to foreigners, that our extravagance has condemned us to a future of debt peonage, you’re wrong.

http://krugman.blogs.nytimes.com/201...stment-income/

Then this paragraph from his column:

It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

http://www.nytimes.com/2012/01/02/op...me&ref=general

What are the implications of Krugman's argument to the iTulip Ka-Poom thesis, which is predicated upon foreigners refusing to purchase more and more US debt? Will they indeed? EJ has said countless times that the US is not Japan, that instead of owing money only to ourselves, we have foreign creditors that must be appeased. Just wondering what others here think about this.

[c1ue]

Re: US Net investment income - can Poom really happen given this?

As usual, moron boy Krugman is choosing his data points carefully.

1) Krugman makes no mention of interest rates.

One reason why foreign investment income in the US is so low is because of ZIRP, because so much of the US 'assets' owned are Treasury securities.

2) Even if we ignore the impact of ZIRP, there's also that little detail called dollar devaluation.

As the dollar falls in value, the 'income' from foreign subsidiaries increase simply due to denominator impact.

Now if we look at these two factors, is it reasonable to say that the relative strength of the dollar and the level of US interest rates are at historically average, historically high, or historically low levels?

I do actually agree that the relative indebtedness of the US isn't as big a deal as might be seen - but this is due to the fact that the US controls the value of the denomination. The US could owe 5 thousand trillion dollars to the ROW, and could halve that debt with a literal stroke of a key punch at the Fed.

However, to say that ownership of the denomination of US debt is the final say is equally misleading. The US dollar as global reserve currency gives the US one last shot at backing out of its obligations; once the step is taken where outright devaluation of US debts is accomplished, the US dollar will cease being global reserve currency.

The impact of this, particularly on the petrodollar standard, is not to be underestimated. In fact arguably this is already occurring. Couple this with the very real trade deficit and equally very real ongoing federal deficits, and there is definitely a problem, Houston.

Thus as usual, the useful idiot is sounding smart in trying to make his point, but in reality is saying nothing.

[vinoveri]

Re: US Net investment income - can Poom really happen given this?

Am I missing something of doesn't the nature of the creditor matter, public or private?

What is the public vs private perecentage breakdown of foreign OWNED assets; and what is the % breakdown of foreign OWED debt? Is this an apples to apples comparison?

Aren't the majority of foreign assets owned abroad owned by private individuals or private corporations in the US, whereas a greater proportion of foreign owed debt is owed by the public?

Seems like an important parameter to consider given the mechanisms of wealth transfer and the "socializing" debt that has been occurring.

E.g., Foreign asset: Exxon owns an oil field in country A; Foreign debt: country A owns $20B in treasury bonds

[thriftyandboringinohio]

Re: US Net investment income - can Poom really happen given this?

What are the implications of Krugman's argument to the iTulip Ka-Poom thesis, which is predicated upon foreigners refusing to purchase more and more US debt?...

Seems to me Krugman's argument is about how far along we are in the process, not what process we following.
He discusses speed, not course. He says we're not as far along as many think.
Our present course will bring us to the point where "...foreigners refuse.. to purchase more and more US debt.."

I hope Krugman is correct, that we have more time and borrowing capacity to correct the situation.

[doom&gloom]

Re: US Net investment income - can Poom really happen given this?

Seems to me Krugman's argument is about how far along we are in the process, not what process we following.
He discusses speed, not course. He says we're not as far along as many think.
Our present course will bring us to the point where "...foreigners refuse.. to purchase more and more US debt.."

I hope Krugman is correct, that we have more time and borrowing capacity to correct the situation.

frankly I hope not. dragging out the pain for decades will not improve the situation. better we see the cancer and cut it out than treat it forever and let it keep growing.