Summary: U.S. net debt payments to foreigners turned positive for the first time in 90 years in Q2. The gap of $2.5 billion was equal to a debt payment of $22 for each American household. A rising debt burden could pressure U.S economic growth or the dollar. However, the linkage between net interest payments and rising U.S debt are unclear: the U.S. seems to be paying only 0.4% annualized interest rate on its debt as of Q2, yet earns a higher rate on its own foreign investments; and some economists even argue that the U.S. is in fact a net creditor, if currently unmeasured income producing assets are included. Nonetheless, U.S. net debt payments are highly leveraged to rising interest rates and the current account deficit. Net debt payments could rise to 1.1% of GDP if the relative return on U.S foreign debt rises by 1 percentage point, and could reach 0.5% to 2% of GDP in ten years depending on the current account deficit. U.S. foreign debt was 20% of GDP at end-2005, versus 15% for the 12-nation euro zone, 17% for the UK and 44% for Mexico. Full WSJ article >
Related links: The Dollar is Rallying For a Good Reason • Soft Landing? Not Yet • John Hussman: Little To Be Optimistic About • Budget Deficit Shrinking; Implications for Investors and Traders • Choosing Between Bad and Worse: The Fed's Unenviable Position • See also commentary on the Euro Currency Trust ETF (FXE).
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