Brad Setser

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The 2008 US net international investment position: Without valuation gains, ongoing borrowing pushes the US deeper into the red

by Brad Setser
June 26, 2009

For a long time, large US trade and current account deficits didn’t push up the total amount the United States owed to the world, at least not if the market value of US investment abroad was netted against the market value of foreign investment in the US. The net international investment position of the US stayed around negative $2 trillion even as the US chalked up $500 billion, $600 billion even $700 billion annual deficits, defying those who projected that rising deficits would put the US external debt on an unsustainable trajectory.

Why? The euros’ rise pushed up the value of US investments in Europe. The US external position actually benefits from a falling dollar, as most US liabilities are in dollars while many US assets are not. And foreign equities did better than US equities.

Those who argued that the US was attracting funds because it was the best place in the world to invest generally forgot to note that during the period when the US deficit was rising the US was consistently doing better on its investments abroad than foreigners were doing on their investment in the US.

That changed in 2008. The US borrowed $505 billion from the world.* The dollar’s rise reduced the value of US investment abroad by $685 billion ($583 billion without including direct investment). Foreign portfolio equity investments in the US fell in value by about $1.3 trillion. But US portfolio equity investments abroad fell in value by about $1.9 trillion. Add in changes in the value of US and foreign bonds and changes in market prices reduced the value of US portfolio investment abroad by $720 billion more than the changes in market prices reduced the value of foreign portfolio investment in the US. The size of that total losses rises if changes in the market value of US and foreign direct investment are also factored in. All told, changes in market prices (other than exchange rate changes) led to a $1.7 trillion deterioration in the United States net investment position.

Combine those valuation changes with ongoing US borrowing and the net international investment position deteriorated in a rather dramatic fashion. The US NIIP — the blue line in the following graph — deteriorated by $2.5 trillion if FDI is valued at market prices.


Underlying data.

Even with this deterioration though the US net international investment position is in better shape than would be expected if you just sum up the United States’ current account deficits — or the financial flows that financed those deficits. The red line represents the US net international investment position implied by just summing up those flows. Nor do valuation gains from currency moves — the dollar’s fall pushes up the value of US assets abroad — explain the gap. The combined impact of currency moves and ongoing deficits — the green line in the graph — isn’t that far from the net international investment position expected by just summing up financial flows.

Nor is the gap explained by better relative performance of US equity investment abroad. That had a large impact on the data for several years, but the market moves of 2008 effectively wipted the cumulative “profits” on US investment abroad from market moves. At least in the data going back to 1990.


The main reason why the net international investment position isn’t worse than it is? The cumulative impact of something called “other changes.” William Cline has called these “other” changes – effectively accounting changes to reconcile the data on financial flows with the data on the stock of US and foreign investments – statistical manna from heaven. He is right. Without these changes, the US net international investment position would be much, much worse.

One quick aside: If FDI is valued at cost rather than at market value, the US net international investment position deteriorated by only $1.3 trillion. It would have been close to the $2 trillion Gian-Maria Milesi-Ferretti predicted if not for a mysterious $420 billion in “other” changes.

There are a couple of other ways of looking at the net international investment position data. One is to disaggregate it into a net debt position and a net equity position — i.e. netting US lending against US borrowing, and US equity investment abroad against foreign equity investment in the US.

My rough calculations suggest US portfolio equity investments abroad are worth about $650 billion more than foreign equity investment in the US (US direct investments abroad are worth about $515 billion more than foreign direct investment in the US). That implies that the US has now borrowed about $4.3 trillion more from the rest of the world than it has lent to the rest of the world.

Foreign central banks – setting aside “other foreign assets” a category that includes a lot of equities – hold about $3.5 trillion of US debt. Even after the extension of $530 billion in swap credit, the US government only has about $700 billion in claims on the rest of the world. The net position of central banks on the US therefore mechanically accounts for the majority ($2.8 trillion) of the world’s net holdings of US debt. That is why there is so much focus on the ongoing willingness of central banks to hold US debt.**

Another little tidbit in the US data: Official investors lost $13 billion on their US investments due to market moves. Private investors by contrast lost $1.22 trillion. They are the ones who should be smarting.

The market value of central banks holdings of Treasuries and Agencies rose by $148 billion in 2008 – or just a bit under 5%. The rise in the value of Treasuries alone was about 5% (a bond whiz should be able to back out a rough estimate of the average duration of central banks’ Treasury portfolio from that data).

Conversely, the market value of “other” official assets – a category that includes the equities and corporate bonds that are held by central banks and sovereign funds (at least those that show up in the US data) – fell in value of $161 billion. That is roughly a 30% loss.

No surprise. But it is kind of ironic that all the angst this year has focused on those parts of central banks portfolio that held up well last year.

China clearly accounts for some of the $161 billion in equity losses – as China (SAFE in my view) bought a large number of equities in the second half of 2007 and the first half of 2008. But I would guess that China accounts for a larger share of the mark-to-market gains on central banks’ bond portfolio than of the losses on central banks and sovereign funds’ equity portfolio. Its overall portfolio held up rather well – all things considered – during the crisis.

I feel a bit guilty for pointing out the large losses China (and others) took on their large equity purchases just before the crisis hit. In aggregate, central banks went into the crisis with a portfolio that was heavy on government bonds – and that portfolio did well.

Then again if China was counting on the mark-to-market gains on its bonds to offset the market losses on its equities, it may need to think again. It never realized the gains on its bond portfolio – and now that Treasury yields have moved back up, China’s bond portfolio has experienced some (modest) mark-to-market losses.

One last set of points — on the academic debate over the United States’ exorbitant privilege and its skill at generating “dark matter” to offset its ongoing trade deficits.

Technically the rise in the US net international investment position doesn’t disprove the dark matter thesis.

“Dark matter” is calculated by calculating the net international investment position implied by discounting net income payments at a fixed 5% discount rate, and comparing that sum to the net international investment position.

The income balance (positive, thanks to income on US FDI abroad) implies, according to this methodology, that the US has about $2.4 trillion in (net) assets, while the NIIP (using FDI at market value) shows $4 trillion in net US debt. Presto, $7.4 trillion in dark matter.

Of course, the argument that dark matter represents US skill at investing abroad – skills that lets the US collect risk premia on those investments – is hard to sustain in a year marked by epic losses of US investment abroad. $2.7 trillion in losses without counting direct investment, close to $5 trillion if mark-to-market losses on direct investment are factored in.

Mechanically, a fall in interest rates increases the amount of dark matter, since the Hausmann and Sturzenegger methodology assumes that the US should be paying 5% on its net debt position, and credits the US with dark matter if the interest rate on US net debt falls below 5%.

And I still think that the gap between the returns on US direct investment abroad and foreign direct investment abroad – a gap that stems entirely from exceptionally low reported earnings on foreign investment in the US (especially low reinvested earnings) – is a function of tax laws that allow US firms to avoid taxes on profits abroad that are held abroad. European and US firms both have an incentive to show profits in low tax jurisdictions in Europe, not the US. That is one of the dangers of inferring assets from the income balance!

NOTE: I edited the middle portion of the post significantly on Saturday to clarify the graphs. My initial post was rather cryptic. I hope the edited version works a bit better.

*Technically, the is net financial flows, so equity investments enter in as well. In practice though it was almost all debt. Treasuries actually.
** All these calculations are a bit rough. I rushed a bit – and reserve the right to refine them as I feed more data into my spreadsheets.


  • Posted by K T Cat

    I think it’s time for the congress and the president to call Dave Ramsey’s show and ask his advice.

    “Uhh, Dave, we’re not doing so well here. We’ve got a couple of trillions on our credit card and a mortgage of 2 trillion and a HELOC for another 2.5 trillion and the rate is about to adjust …”

  • Posted by Cedric Regula

    KT Cat

    Just heard on CNBC this morning that the average duration on Treasury debt is now 4 years. So we can add the public debt to our list of revolving credit items.

  • Posted by ReformerRay

    What is the green line in Chart 1? Is it the red line adjusted for exchange rate changes? (showing that exchange rate changes do not explain most of the changes used to create NIIP)

  • Posted by Cedric Regula

    “Mechanically, a fall in interest rates increases the amount of dark matter, since the Hausmann and Sturzenegger methodology assumes that the US should be paying 5% on its net debt position, and credits the US with dark matter if the interest rate on US net debt falls below 5%. ”

    We must be up to our eyebrows in Dark Matter. The yield on the 3 and 5 yearlings are 1.64 and 2.58. If the Treasury average duration is 4 years, that computes to a 2% rate on the debt.

    So we have increased our Dark Matter by 3% over what theory suggests. (excluding currency adjustments.)

    So this is called “investment skill” if we can get 5% in an overseas bond fund? How flattering, but when I try to spend it at the store I tend to think that economists know as much about Dark Matter as physicists do…not much.

    But the other thing to consider is that foreign central bankers get paychecks to suppliment their investment income. So maybe that’s why the US private investor tries harder.

  • Posted by bsetser

    the green line in the first graph shows the impact of currency valuation effects alone — it is meant to show that currency valuation effects are too small to explain the reported NIIP, as they generate only small fluctuations around the level of the NIIP that would be expected by summing up financial flows. think of the green line as “financial flows and currency valuation effects summed over time”

  • Posted by MakeMeTreasurySecretary

    It looks like we have no choice but to do the unthinkable. Save more!

    Maybe my mother had a point when she advised me to put aside one out of every seven dollars I make (no religious connotation — I think). We are finding out that the average person needs a savings rate between 10 and 15% to prepare for retirement. More and more people realize that the long-term real returns of most investments are rather low (closer to 2 percent than the advertised but not often materialized 8 percent). So, most of us are back to plan S, as in saving.

    I know it is somewhat difficult to exactly quantify the savings rate but I will take the 6% present savings rate that was reported today at face value. I think that the savings rate will have to perhaps double from this point on. IF (big if) that happens, then all the predictions about inflation and collapse of the dollar may be proven completely wrong. If anything the dollar may appreciate. The economy will have to operate at a different pace.

  • Posted by jonathan

    Since I first heard the words ‘dark matter’ in a non-cosmological context, I’ve thought it was mostly hooey. You say it so nicely.

    The data is really cool to go through. Thanks.

    Two quick thoughts:

    – I wonder how this same analysis looked for Britain as they faded. I know this work has been done in various forms.
    – was this last period especially fertile for ideas that sought to explain why that period would go on forever? As in the end of major cycles, the end of tail risks. Or is this the way it always is and we don’t remember the failed ideas from the last cycle?

  • Posted by anon

    This presentation is confusing.

    Would be clearer if you reconciled components starting with the cumulative current account deficit – or is that what you mean by cumulative flows?

  • Posted by yoda

    this lunatic at pimco talking about FED targeting fed fund rate and FED has no exit strategy for a long long time. one word, FED need to stop creating credit, equity, commodity, real estate bubbles, let the free market work the thing out. and we dont need lunatic to support what FED is doing now.

  • Posted by yoda

    and to believe or trust FED to soak up those excess reserves with various magic tools is just pathetic. they never able to do it, that is why we had so many bubble bursting experiences.

  • Posted by Cedric Regula


    They will keep trying until the last Jedi are gone.

    May the Force be with you….

  • Posted by bsetser

    anon — i was a bit cryptic (my bad) but cumulative flows is very close to the cumulative current account deficit. technically it is cumulative net financial inflows not the current account, but the two are theoretically the same and but for errors and ommissions, match up. apologies for the very inside baseball presentation.

    make me treasury secretary — we are back on plan S (good choice of words). let’s see how long it lasts. but after a period when americans surprised the world by how little they saved, we may have shifted gears. who knows. so far though the trajectory of personal savings seems quite close to the forecast of goldman’s (quite good) economic team last fall — a forecast based on the expected impact of (negative) wealth effects.

    i remember when i was mocked by many in the comments suggestion for suggesting that Americans might respond to the crisis by saving (as frankly most models expected) …

  • Posted by Cedric Regula


    I find it neccesary to tell everyone that I just bought a $100 list price golf putter for %12.50.

    It is a US name brand, but it does say “made in China’ on it, and everyone knows golf equipment suggested retail prices are a bunch of BS, for lack of a better word.

    But I do putt better with it, so it was a good expenditure of $12 in my mind.

    Just had to mention that. BTW, the energy bill just passed the House.

  • Posted by Rien Huizer


    You cannot expect revals to compensate for flows for ever! The question is of course what is the significance of this position for gvt policy. Suppose someone would crank up the USD (against everything else) by 30% without any change in the deficit trend. Would anyone get concerned if the NIIP blew out by a billion? And what if the reason for the rise in the USD was 10 yr yields of around 7%? What would that do to dark matter? I find this very difficult to evaluate.

    Perhaps this would be OK: the cumulative flows are real and tangible and driven by macroeconomics (but the composition of those flows may matter: gvt, private, debt, equity). The valuation changes for FX are probably OK, but a little noisier. The valuation of non-listed FDI is a lot noisier. Dark matter is.. dark matter (

  • Posted by Tim

    *Technically, the is net financial flows,… ??

  • Posted by Dave Narby

    From the “dark matter” paper:

    “We call the difference between these two equally arbitrary estimates dark matter, because it corresponds to assets that we know exist, since they generate revenue but cannot be seen (or, better said, cannot be properly

    Well there’s the problem: Nobody knows what these assets are actually worth. Sort of the same problem with a lot of other assets these days.

    IMO, when a financial situation (that should be able to be explained by simple arithmetic) becomes so opaque that educated, intelligent people decide to use theoretical astrophysical terms as euphemisms in an attempt to explain it, then perhaps the whole damn thing needs a teardown and rebuild.

    Likely that is what will happen.

  • Posted by locococo

    The debate went from funny to silly and back on the back of lunatic provisions trade war starters and equally lunatic appearances… and please remember the 4 words: jobsx4.

    Can t wait for some more goldie estimates …

    on cap n trade r us !

  • Posted by bsanchez


    So the US’ luck might be up. In any case we the Spanish envy you. Our recent current account deficits of 10% of GDP have pushed our NIIP towards 900 billion euros, nearly 90% of GDP. You are still a long way away from that.

  • Posted by anon

    “i remember when i was mocked by many in the comments suggestion for suggesting that Americans might respond to the crisis by saving (as frankly most models expected) …”

    Given the large increase in the fiscal operating deficit, and assuming no great change in the level of investment, there is no possible outcome other than an increase in saving by other sectors. And given the decline in the current account deficit, businesses and households are left to make up that difference as well. It is inevitable that most of the saving adjustment must fall on households. Government expenditure corresponds to an amount of private sector income that can’t be spent and must be saved. It’s essentially a macro level identity, apart from any micro behavioural argument.

  • Posted by DJC

    China PBoC demands end of US Dollar Reserve currency status

    The optimists that have long assumed that the dollar will continue to reign supreme due to lack of alternatives have just have their sanguine views challenged as China threw down the gauntlet on coming up with an alternative, non-country-specific, reserve currency.

    Many had assumed that the China talk on moving to a special drawing rights regime, or a similar approach was just that, talk to serve as a bargaining chip in negotiations. Surely the Chinese would not jeopardize the value of their dollar holdings!

    Well, that simply isn’t a rational view of things. The proper way is to construct a decision tree and look at the attractiveness of various moves going forward. The FX reserves are a sunk cost. Continuing to support the greenback long term is a losing strategy, It just digs the Chinese into a bigger hole. The Chinese want their cake of a continued trade surplus without the attendant costs of supporting the dollar, and more important, continued US hegemony (yes I hate that word, but it fits here), Even if they face FX losses in an SDR regime if they insist on continued large trade surpluses, they’d have much more influence over IMF than they do over the US policies.

  • Posted by Indian Investor

    Dr. Setser, Appropos the title of your post,though I haven’t gone into the details of the numbers and source data of your essay here; there’s a basic question with two schools of thought that’s very relevant to your analysis here. Flows from Foreign insitutional investors were hugely negative in, for instance, the Nifty, through 2008. Whereas domestic institutional investors continued to have a net buy each month throughout the crisis. The most common explanation is that due to the repeal of Glass-Steagall, liquidity levels of FIIs were connected with their holdings in EM equities.As a liquidity crisis rapidaly morphed into a solvency crisis for the US banking system, FIIs were forced to liquidate otherwise profitable EM equity holdings in panic sales, causing a fall of 64% in the Nifty, for instance.
    Regarding the recent rally however, there are two schools of thought. One holds that the rally is driven simply by the increased liquidity levels – fundamentally nothing has improved since November, except liquidity. The other holds that the increased liquidity hasn’t been directly deployed into the equity markets. It’s still ‘gathering dust’ in bank vaults. But the abatement of the liquidity crisis caused a slight asset re allocation to risky equities, based on expectations of changing fundamentals.
    Where would you stand on this? Specifically, do you see a flow of capital into equity markets to value stocks at higher prices, simply due to the increased availability of credit to the banking system in comparison with, say, October last? What implications does that have for your analysis of the US NIIP effects of the crisis?

  • Posted by Cedric Regula


    Wish I new where to get the numbers. I can sort of estimate what the dollar amount in US equities is…it went from $8T at the March low to about $11T today. The percent increase in BRIC equities was larger.

    But there is at least one permanent systematic change that occured. All of our IBs either disappeared , or in the case of GS and MS, they applied to become commercial banks. This means the legal leverage they can use went from 30:1 to 12:1.

    Hard to say whether the market collapse worldwide were forced or willing liquidation. Obviously it was a lot of both. Lots of hedge funds and private equity funds just closed because of redemptions by investors. Brokers also increased margin requirements.

    But I think investor psych is returning to the pre-crisis mindset. They are looking for returns, beyond 0%, and will take some risk to do it. The idea that BRIC equities are better than the S&P 500 is returning.

    The difference is the allowable leverage has decreased, and we only have a fairy tale economy to base PE ratios on.

    Then the Bush tax cuts expire in 2010. Then we get cap&trade&tax, and the lights go out.

    This will be bad for US stocks.

  • Posted by guest

    Cedric, Indian investor

    The thread hereunder may help on leverage distribution of incomes (I fail to see deleveraging see tables 4 7)but one may read above average incomes in equities derivatives.
    One may fail to understand the meaning of gearing ratios for commercial banks and the weighing of derivatives on owned funds.

  • Posted by Cedric Regula


    Ah, yes. Derivative incomes. This is where my eyes glaze over. It is my micro lately, but the macro is mind boggling.

    So they say the US commercial banks’ derivative exposure is $202T, with 84% in “interest rate products”. So my counterparty to TBT is somewhere within that group. I’d better keep reading these reports to see if they are staying solvent.

    The global number for derivatives is $450T, or something like 8X global GDP.

    Our financial scientists used to tell us that we can take comfort in the fact that these are “notational amounts”, which is not really like real money. It is more like “matter” and “anti-matter”, which quietly becomes nothingness when mixed together.

    OK, I feel better now.

  • Posted by Indian Investor

    Guest- thanks a lot for posting the OCC report link.

  • Posted by locococo


    … if that ll be bad for US stocks (r us) , NIIP aside, wouldn t that then be good for US bonds(r us)?

  • Posted by locococo

    … given the probability that 84% of those 84% are hiding in primary paper pusher s BS….

  • Posted by Cedric Regula


    It would, provided that we don’t see any problems with those.

    But don’t underestimate who may win the ugly contest….the Fed printed a whole lot of dollars the last 30 years, and most central banks at least matched printing press speeds. It all has to go somewhere….

  • Posted by FollowTheMoney

    In my view, there are great comparisons between Michael Jackson and the state of the U.S. economy.

    Both need greater and greater injections to stay afloat…until…….

    I’ll let everyone on this board think twice about this thought, perhaps a bit off topic (sorry Bsetser) but still something of consideration as we mourn the loss of a historic American figure.

  • Posted by Cedric Regula

    Long live the following. We know some of them carry British passports and may be knighted, but they are truly Americans at heart.

    The beatles, stones, yardbirds, animals, hendrix, joplin, ray charles, stevie wonder, miles davis, brecker bros, crusaders, howlin’ wolf, willie dixon, hound dog taylor, koko taylor, bob dylan, crosby, stills and nash and maybe even young, cream, led zeppilin, black sabbath, santana, james gang, jeff beck, genesis, yes, moody blues, king crimson, pink floyd, steely dan, fleetwood mac, johnny winter, and edgar, allman bros, leonard skynard,savoy brown, frank zappa, wishbone ash, john mclaughlin and mahavishishu orcestra, chick corea and return to forever, jean luc ponty, john ambercrombie, pat metheny, police, eagles,…and metallica, mars volta, tool and dream theater for trying to keep the string going,,,and mastermind and porcupine tree for succeeding

  • Posted by guest

    Missing Otis Redding, James Brown,Bee Gees they had a good rap.
    To be in line with the subject,they contributed positevely to the US current account.

  • Posted by Cedric Regula


    ya, I know I missed a bunch of them. traffic comes to mind and also weather report and alan holdswoth in the jazz fusion genre.

  • Posted by FollowTheMoney

    Michael Jackson is a symbol of the United States…remember “don’t live above your means”… and that is what this entire crisis is truly about…

    and the readjustment is just starting…

  • Posted by locococo

    As for artists on NIIP – did I miss some more public enemies therein?

    follow … according to occ – better not to upset any interest rate while embarking on readjustment!

    Otherwise interest rate “products” might then upset som off BS vehicles of some primary dealers of yield generating paper on its way to QE.

    Touch the IRs and see 911 become a joke in your town.

  • Posted by Indian Investor

    Dr. Setser, a couple of data points regarding the US savings rate from the latest Z1 release. Besides, I’ve discovered an interesting puzzle in the Flow of Funds data. In table F.10 of the current Z1 release, have a look at line 42 – Personal saving without consumer durables fell from $831.5 b in Q4 2008 to $ 390.6 b in Q1 2009, a massive 53% fall in US personal savings in a single quarter! Meanwhile, in line 43, personal savings grew from $ 342.3 b in Q4 2008 to $475.5 b in Q1 2009 – an increase of 39%. Line 42 considers the net acquisition of financial assets,investment in tangible assets (adjusted for consumer durables), the net increase in liabilities and capital transfers to arrive at the personal savings figure. Line 43 on the other hand considers the difference between total personal disposable income and personal outlays from table F.100. Mapping the changes in line 42 components from Q4 2008 to Q1 2009 shows: net acquisition of financial assets fell from -604.90 b to -281.20 b. i.e. Americans sold $323.70 b LESS of financial assets in the latest quarter. Net Increase in liabilities was -1,190.60 b in Q4 2008 whereas it was – 527.40 b in Q1 2009. So Americans had a LOWER reduction in their liabilities by $ 663.20 b in the latest quarter. Taken together, their net savings decreased by $339.50 b as a result of these two factors. Add in lower investment in tangible assets by $ 80.40 b, and you’ve accounted for most of reduction in personal savings this quarter.
    According to the FOF measure above, personal savings reduced from 7.8% in Q4 2008 to 3.6% om Q1 2009.
    On the other hand, the NIPA measure shows a increase in savings from 3.2 % of PDI in Q4 2008 to 4.4% of PDI in Q1 2009.
    There seems to be a consensus projection by a broad range of economists that the US savings rate is headed for 10% in the near future. Would you care to comment/clarify on this?

  • Posted by bsetser

    Indian investor — i haven’t gone beyond looking at line 43. the latest data on consumption and income (from may I think) implies a further rise in the household savings rate. i would expect it to continue to rise for a bit longer, and then think there is a strong change it will remain elevated relative to the recent past (or at a more normal rate if the recent past is viewed as an outlier).

  • Posted by Indian Investor

    Dr. Setser, Thanks for your reply. I was also trying to objectively verify what exactly is meant by ‘credit bubble’. From Table L2 the total credit market debt owed by the Household sector is $ 13,748.5 b. From Table F7 the SAAR compensation of employees for Q1 2009 is $8024.9 b. Disposable personal income was $ 10,783.9 b in Q1 2009. Including mortgages, consumer credit and all other debt instruments, the US household sector owes 127% of its annual personal disposable income as of end of period 03 2009. On the other hand, the SAAR personal savings of 475.5 b is 3.46% of the total debt outstanding. 3.46% of total debt outstanding is perhaps insufficient to service the total outstanding debt. However, unless offset by increased net exports, increased savings can negatively impact PDI.

  • Posted by Indian Investor

    On second thoughts, Americans appear to be saving 3.46% of their total debt outstanding every year AFTER making their debt servicing payments. In Table F.100, line 3 is disposable personal income ($10,783.9 b) and line 4 is personal outlays ($10,308.4 b). Obviously ‘personal outlays’ must include paying the EMIs to service existing debts, since those payments don’t appear separately anywhere else.
    Surprise, surprise! It looks like the problem is much more a case of huge wealth inequities amongst Americans,rather than a case of the American Empire steadily decaying away due to excessive debts!
    Just to repeat quite a startling discovery, Americans as a whole owe only 127% of their annual personal disposable income. After making their EMI payments, they saved 3.46% of their total outstanding debt on an annual basis in the latest quarter. Meanwhile, credit card defaults are around 10% according to a blog post by Calculated Risk. The official unemployment rate is 9.4%, and including people working part time for economic reasons, the estimated unemployment leve is 16%. The Goldman Sachs Towers inhabitants are getting record bonuses, and presumably saving much more than the 3.46% above.
    Michael Jackson isn’t representative of the US economy; there isn’t any credit bubble; and the American Empire isn’t decaying away due to excess debt!

  • Posted by guest

    Personal expenditures decline much faster than personal income.

  • Posted by WStroupe


    With such a serious (large, rapid) deterioration in the U.S. NIIP, and in spite of CBs’ ongoing purchases of Treasuries (ostensibly, mostly to keep their currencies stable against the dollar for the time being), doesn’t it really look like U.S. domestic savers are really the entity that accounts for the bulk of ongoing demand? Or, at least, doesn’t it look like that entity is rapidly increasing its role while the role of the CBs is rapidly decreasing? And doesn’t it look like this trend is becoming firmly set?

    Quite a number of posts back in this blog I think you pointed to this trend of waning CB appetite and mounting domestic U.S. saver appetite for Treasuries as a likely trend that would allow the Treasury to finance itself. Looks to me like that’s coming true. If it is, doesn’t that sort of relieve China’s CB of some pressure to keep buying Treasuries, and afford it some breathing room to diversify? I mean, aren’t the leaders of China happy to see others step up to buy instead of so much pressure to do so remaining upon China? And might this situation not signify that China will soon accelerate its diversification efforts, though not too fast, while it has breathing room afforded by domestic U.S. savers? TIC data going forward is going to be quite interesting, I imagine.

  • Posted by WStroupe

    I’m not a fan of Greenspan, but I think he’s making some pertinent and forceful points in his recent FT piece here:

    There’s no sign of inflation yet, ha! ha! – so say many at present. But it’s way, way too early to declare that U.S. finances and monetary policies aren’t going to lead to inflation down the road. Greenspan worries that political constraints (cowardice) will lead to keeping dangerous policies in place, or even kicking such policies into high gear and inflation will return with a vengeance. This mirrors the concerns of CBs and I think helps to explain reluctance to significantly deepen their exposure to the dollar. As Roubini said just the other day, the CBs are seriously worried, and they’re not simply going to sit idly by and watch Treasuries, the dollar and their huge holdings wither. While there may not yet be a tangible sign of reaching a full turning point as respects their appetite for the dollar, we’re surely nearing it.

  • Posted by Cedric Regula


    Here’s a good article talking about how the savings rate is calculated. It’s from 2005, so the data is old, but the historical charts are good to see. The latest official number from BEA was 6.9%. I read elsewhere that it does include pension plan contributions, but not 401k contributions. I think only 8% of the workforce gets the traditional pension plan anymore, and you can go up to 10% of pretax income into a 401k. So that adds some doubt to the data.

    Whether that is a meaningful number is a good question. It’s like saying the average household size is 2.75 people, then you can’t find the average household anywhere.

    I’ve always thought it should be graphed by age. If you are a young worker buying a first house, it’s very normal that your debt to income ratio is 3:1 and you have no savings. But if we are a country of retired millionaires, then we would have probably a negative savings rate. Both scenarios are economically ok.

    However, the article does reference the 2005 Greenspan/Kennedy study that said there was $435B of HEW each year from 2001 thru 2004. I remember later reports that it increased to $600B-$700B a year in the following years, until collapsing and then, voila, the recession arrived.

    I think the US consumer will try and increase the personal savings rate, but will be frustrated by tax increases at federal, state and local levels. So any reduction in consumption will be caped&traded&taxed away.

    Which would lead us to how the national savings rate is calculated. In this one they throw in the fiscal deficit. For some reason they think it matters.

  • Posted by Cedric Regula


    Greenspan should know. In the entire history of the Fed, they have never raised interest rates until employment numbers start to increase. If they try to do it this time (if you think such a thought would cross Gentle Ben’s mind)we would have the White House, Congress and Wall Street screaming bloody murder.

    The new problem we have is $150 trillion plus in interest rate derivatives. The derivosphere could catch fire and end the financial world as we know it, just when we thought we put that problem behind us.

    Lately our students of the Great Depression are reminding us of “The Big Mistake of ’38”. This was when the USG took the punch bowl away too soon, and the party never got started.

    I’m sure we won’t screw up like that again. So we just need to figure out where the money comes from.

  • Posted by FollowTheMoney

    Can someone please explain why both the NY Fed and the Obama Administration just cannot say “Look America, we’ve lived far above our means and we’re going to have a severe readjustment of our traditional standard of living the last 25 years”.

    Why is this so difficult? Is the corporate influence, is the administration refusing the accept the facts? Or is just complete denial?

    In my view, the NY FED is very aware of the root of the crisis, but they’re finding a difficult campaign to notify the great people of this great country that we need to restructure our way, and our perception of life.

    I’d encourage both the Fed and the Obama Administration to look at PR and study groups of readjusting America. Obviously the readjustment will be very difficult, corporate profits will come down, but this will need to happen much sooner than most expect. The Fed, in my view, can no longer buy the 10-20-30 year notes. They need to start contracting the money supply, if not we’re headed toward full force dollar devaluation and severe inflation.

    Look around what’s happened last 2-3 months, prices of all consumer necessities have gone through the roof. Especially food and energy.

    The consumer is simply out of action, high food and energy prices simply don’t mix well with the current level of the projected consumer S&P earnings.

    Unemployment is probably closer to the teens in percent, the market is not reflecting the “real economy”, nor is it truly “forward looking”. The market should be grateful for the good graces of “government intervention”, however the big question is how LONG can this continue?

    Additionally, I also worry that the FED will probably keep rates at 0-.25% for at least the next 12 months. I’m a bit concerned, of the U.S. debt levels, both private and now public. This is not good. STOP THE BORROWING!

  • Posted by Cedric Regula


    I think the short answer is we can’t…we are stuck between a rock and a hard place. The threat of debt deflation/financial meltdown and knockon effect to the real economy and employment, which feeds back to the financial side, hasn’t really gone away yet.

    I liked Greenspan’s article posted above. I think he pretty much hits the nail on the head with all his points. It’s amazing how clear headed people can get when not holding an important government office.

    Tho I do think Obama and friends are a bit spendthrift in the handling of all the crisis that fell on them at once. But there wasn’t a whole lot of time to consider other ways of doing things. Then again, they are planning to spend huge amounts on reforming health care. And dumping this fuzzy idea of cap&trade&tax on us, in the name of saving the planet, which includes China and India. So taken all together, when we voted for “change”, it looks to me like we tossed out all the old Republican baggage, and moved in all the old Democrat baggage.

    It’s just that we seem like maybe we really can’t afford to do all these things. Maybe Santa Clause needs to take a few years off.

  • Posted by FollowTheMoney

    @ cedric,

    the problem i have is that there is no real framework to when the spending is going to end. already hearing suggestions about “Stimulus II”
    that is why i fear we’re on the path to have severe inflation problem and/or dollar devaluation down the line (years out). And it’s not like there’s going to be any public warnings. none of rating agencies DARE challenge the credit rating of the U.S….for if they did, they’d probably be toast over night. At least in my opinion.

    we need to get to the root of the crisis, the global imbalances and it’s very hard for leaders to confront this problem. Majority of people i talk to have no idea what’s going on. They have no idea how great the imbalances in our world are, and the dangers that come with them. Very few people even know of this informative blog (but they sure should). Now is it up to the people to learn independently, or is up to our government to educate??

    Maybe a solution to crisis would be more informative layout of the readjustment we must face. It’d be great to have Obama explain where we are and the structural changes needed. Unfortunately i’d say less than 1% of all citizens understand the true root of the crisis, and if we can’t understand the root, then how can we all work together to repair? We need mass-education to address the problem, and mass education to address the solution.

  • Posted by WStroupe

    Cedric Regula,

    I must admit that I’m not near intelligent enough to understand derivatives and all their implications – so I can’t get my arms (brain) around that issue. But I’m worried that the notional, net-zero sum might not turn out to be net-zero if these things crash in a time and way the experts haven’t considered. 400-500 trillion $ is a pretty scary sum even if a very small percentage, say 3% to maybe 5% of these instruments crash without being nulled out by their antimatter complements.

    But getting back to the implications of this post, I’m still wondering quite a bit about the implications of such a deterioration in the U.S. NIIP. How does this play regarding official foreign vs private domestic financing of the U.S. Treasury?

  • Posted by Cedric Regula


    Ya, my brain doesn’t like thinking about derivatives of the financial variety either. Knowing what $43T of mortgage CDS can do is enough for me.

    At the beginning of the year I had convinced myself that the $50T in US personal net worth would be adequate to cover reduced foreign investment in treasuries. Then Chairman Ben announced $300B in QE and unconvinced me. Now I think we will be doing more of that to cover any gap in US plus foriegn investment. The dollar lost 5% immediatly on that announcement. The thing is, US exports/corporate profitability did rather well when the dollar index was 70 (80 now). So this is a part of the cure, provided we don’t get into a global game of competitive de-vals, which has started to occur already. And it has some implication on oil prices, once OPEC gets some pricing power again. (what we see now is speculator driven)

    But too much of a good thing can be bad, so you never know, maybe as the treasury has to roll over the entire public debt in 4 years now, we will find no takers for the new deficits, or the re-financing of the old debt.

    Followthemoney: I think we get what we always get. Life will slowly grind down our expectations, and the government will keep telling us that they care, and are here to help.

    But I also think they may try putting punitive import tarrifs on countries that refuse to play along with the global warming mantra. It would be a clever way of disguising protectionism and calling it saving the planet. It’s so tempting I’d almost bet money on it.

  • Posted by don

    Nice post. Seeing data like these, however, tends to increase my aggravation at the failure to address the problem of central bank interventions.

  • Posted by netdebt

    The graphs given here are really intresting.In these days of recession,it is tough to tie expenditure and income.Income is getting decreasing day by day.