In the second quarter of 2004, the United States posted a current account deficit of $665 billion, or 5.7% of its total GDP, the largest in its history. The current account is the broadest measure of a nation’s balanceof income payments with the rest of the world, and it is the difference between a nation’s receipts (exports and returns on domestic holdings of foreign investment) and its payments (imports and returns on foreign holdings of domestic investment). Just like a household that spends more than it earns, a nation must finance its current account deficit through borrowing.
This borrowing on the part of the United States has, predictably, led to an enormous foreign debt, or, more specifically, to a deterioration of the U.S. net international investment position (NIIP). This position has now reached -24% of the entire U.S. gross domestic product, a deterioration of 14% of GDP since 1997. Financing these obligations has been relatively painless for the past couple of years due to historically low interest rates. But economic policy makers cannot bank on these low rates forever, and within the next decade the economic consequences of rising U.S. external debt obligations will constitute a massive loss by American households of claims to future income generated by the capital stock of the United States. In a nutshell, although the U.S. economy may not be eating its seed-corn, it is financing current consumption by selling away today the claim to income generated by tomorrow’s harvests.