OK, I am not really ready to give up.  But the 2005 net international investment position (NIIP) data sure didn't provide me much to work with.

For a couple of years now I have been warning against the long-term consequences of big external deficits.    And specifically, I have argued that big trade deficits mean big external debts – and that if the US wants to keep its external debt from rising, it needs to implement a set of policies to bring its deficit down.    Bringing the US trade deficit down isn’t just a US responsibility, of course.  Policy changes in the rest of the world could help.  Deficits don’t exist without surpluses elsewhere. 

But it is hard to make that case when US net debt – here I am using net debt as a synonym for the net international investment position, a measure that includes the equity claims – just doesn’t rise.

The net international investment position of the US just hasn’t deteriorated since the end of 2002, despite deficits of nearly $525b in 2003, $670b in 2004 and almost $800b in 2005.   US net debt was around $2.3 trillion at the end of 2002.   And it was around $2.55 trillion (valuing equity investment in the US and US equity investment abroad at market value) at the end of 2005.      

 The story that emerges is that the US is just borrowing against the risings value of its existing foreign investments abroad.  Just like US households are borrowing against the rising value of their homes.   Debt is only a concern if it isn’t backed by assets.   External debt matched by rising external assets isn’t a worry.

At least not so long as the US can count on: 

• Enough financing from the world to allow it to borrow against the rising value of its external assets (as opposed to say selling those assets to finance ongoing deficits); and
• Continued rises in the market value of its external assets

I still have some doubts about both points.   At least in the long-term.

But first things first.  If the data holds, I pretty much have to concede 2005 to the don't worry crowd.