Will Debt Payments Drag Down GDP or the Dollar?

| About: CurrencyShares Euro (FXE)

Excerpt from our One Page Annotated Wall Street Journal Summary:

U.S. Foreign Debt Shows Its Teeth As Rates Climb

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 ReasonSoft Landing? Not YetJohn Hussman: Little To Be Optimistic AboutBudget Deficit Shrinking; Implications for Investors and TradersChoosing Between Bad and Worse: The Fed's Unenviable Position • See also commentary on the Euro Currency Trust ETF (NYSEARCA:FXE).

Seeking Alpha is not affiliated with The Wall St. Journal. You can receive Seeking Alpha's Wall Street Journal Summary by email every morning by signing up here (free, no spam).