U.S. net debt hits $4 trillion in 2011—the cumulative toll of a generation of trade deficits

The U.S. Bureau of Economic Analysis (BEA) recently announced that the U.S. net international investment position (NIIP) was -$4 trillion at year-end in 2011 (see figure, below). The NIIP stood at -$2.5 trillion at year-end 2010. The $1.6 trillion increase in the net debt was largely caused by price changes of -$802 billion (on domestic and foreign holdings of stocks and bonds) and by net financial flows of -$556 billion. Net financial flows were largely explained by financing of the $466 billion U.S. current account deficit in 2011. The current account is the broadest measure of the U.S. trade deficit. While the costs of financing the NIIP were relatively small in 2011, they could rise rapidly if interest rates return to more normal levels in the future.

The United States has been borrowing hundreds of billions of dollars per year for more than a decade to finance its growing trade deficits. However, until 2011, the U.S. NIIP has not declined proportionately, as shown in the figure below, primarily because of gains in the prices of foreign stocks, the decline of the dollar (which made foreign currency holdings more valuable), and frequent accounting revisions (which have found more and more U.S. investments abroad).

Last year, several of those factors moved against the United States as the NIIP declined $1.6 trillion to -$4 trillion. That’s real money. Foreign investors (primarily foreign central banks) held $5.7 trillion in treasuries and other government securities at the end of 2011. The United States paid, on average, about 2.3 percent in interest on all of those securities. These low rates are caused by the still-depressed U.S. economy operating far below potential, and are unlikely to rise unless the U.S. economy begins operating much closer to full-employment. But, if this recovery happens and the NIIP remains roughly as large as it is today, then debt service costs could rise significantly. For example, if the average cost of government debt rises to 4.5 percent, it would add another $124 billion to the U.S. government deficit. If this rise in U.S. borrowing costs, furthermore, was not matched by a rise in global interest rates, then this would actually cause a net decline in U.S. GDP, as income flows out of the country to service debt increased and were not matched by increased inflows that paid U.S. owners of foreign assets.1

The U.S. NIIP represents a potential claim against future national income, and the size of this potential claim is growing dramatically as shown in the figure above. Each year that we allow large trade deficits to continue is another year that adds to this claim on future incomes—yet this actual intergenerational transfer is often ignored while a non-existent intergenerational transfer (that one allegedly caused by rising federal budget deficits) attracts much attention from pundits and economic commentators.2


Board of Governors of the Federal Reserve System.  2012. “Selected Interest Rates (Daily) – H.15:  Historical Data.”

U.S. Bureau of Economic Analysis (BEA).  2012. “International Economic Accounts: Balance of Payments.”

U.S. Bureau of Economic Analysis.  2012. “International Economic Accounts: International Investment Position.


1. Average rate of return on U.S. government securities in 2011 calculated from data in the current account (BEA 2012a) and the NIIP (BEA 2012b). Return on seven-year treasury securities used for comparison. The average return on seven-year treasuries was 2.16 percent in 2011 (Board of Governors of the Federal Reserve System 2012). Their average return in the pre-recession period of 2000-2007 was 4.52 percent.

2. Interest payments on government debt owed to U.S. citizens only reallocate income from taxpayers to domestic bondholders. Foreign holdings of U.S. securities represent claims on future income, which are qualitatively different. Interest payments on foreign holdings reduce U.S. GDP, while interest paid to domestic holdings does not. Given the existence of substantial unemployment and the predominance of deficit opponents in Congress, increases in the government debt due to financial outflows could result in further spending cuts, which would cause a further decline in U.S. GDP.

  • Narendra C. Bhandari, Ph.D.

    Trade Equilibrium to Keep &
    Create Jobs

                            Trade deficit is the
    principal reason for America to lose millions of jobs to workers overseas. “Trade Equilibrium”
    is the solution. I define “Trade Equilibrium” as a situation when trading
    among different countries is such that the trading partners remain generally
    deficit-free from one another over a cycle of every 2-3 years. This theory has
    two major goals: (a) to stop exporting of additional American jobs and (b) to replace
    the American jobs already exported by “requiring” the dollar/trade surplus
    countries to use those dollars to buy American goods and services.


                            Assuming that this
    concept of Trade Equilibrium becomes effective beginning January 1, 2013, it
    will have the following benefits:

    2013, the annual U.S. trade deficit—considering the world as a whole—would reduce
    to zero. The net export of American jobs would reduce to zero. (During
    2001-2010, the U.S. exported an average of 1.95 million jobs every year; or, 3 jobs per $1 million of trade deficit.). Data
    source: Bureau of Labor Statistics.

    2013, the dollars surplus countries would have to reduce their hoard to zero over
    a ten-year period by purchasing American goods and services. Subject to the
    American national security and laws, they can buy any goods or services made in
    America they want to.

    would increase American exports and, for the first time, create for it a net
    trade surplus of $460 billion (10% of $4.6 trillion of foreign debt, excluding
    interest, as of February 2011).

    2013, the U.S.–due to its annual incremental exports of $460 billion—would create
    1.38 million net new jobs per year for ten years.

    2013, these changes would increase individual income, reduce poverty, enhance both
    corporate and stockholders’ wealth, raise governmental tax revenues, and trim
    tax rates.


    Global Benefits from Trade

    more jobs and higher incomes, Americans would spend more on American and
    foreign products. The resultant multiplication of trade between countries will
    give birth to the next economic revolution—effects of which would be many times
    more than that of James Watt’s steam engine. And it would be a win-win, positive-sum
    phenomenon, not a zero-sum game. It would enhance democracy, peace, and
    prosperity around the world.

    dollar surplus nations can use their dollars to buy the goods
    and services they need from America, or from any other countries. In the latter
    case, these other countries would have the surplus dollars—other things being
    equal. Either way, these purchases would help them improve their infrastructure,
    jobs, and standard of living.

    These countries would earn a much
    higher rate of return on these improvements than what they currently earn by
    investing their surplus dollars in the U.S. bonds. They would also save
    themselves from sitting on dollars which are declining in value. And because
    they would be dipping into their surplus dollars account for those purchases,
    it would not create net trade deficits for them.

    If a dollar surplus country, such as
    China does not cooperate voluntarily, the U.S. must begin to move its business
    to those countries which, on the one hand, can fulfill its import requirements
    and, on the other, would also use the dollars so generated to buy American products.
    While finding alternate suppliers would be time consuming and complex, it has
    to be done to create net new jobs in the U.S.


    Leading the U.S move toward Trade

    Anyone can provide such leadership.
    Examples: (a) The U.S. President, (b) the U.S. Congress, (c) Democrats, (c)
    Republicans, (d) chamber of commerce, (e) labor unions, (f) IMF, or (g) EPI.



    a fuller understanding of my theory, please refer to my two-part article “America
    Must Legislate Trade Equilibrium To Keep & Create Jobs,” Economy in Crisis, November 7-9, 2011. Thanks.

    –Narendra C.
    Bhandari, Ph. D., Prof. of MGT, Pace Univ., NY.