Saturday, July 05, 2003

Rebecca McCaughrin at Morgan Stanley checks in with a nice little column on Friday on the US net international invesment position.
The US continues to burrow deeper into debt. The net international investment position, which is the difference in value between US and foreign holdings of overseas securities and FDI, dipped to a new record low at the end of 2002. As US assets become a larger component of foreigners´┐Ż wealth, investors naturally grow concerned about the currency and valuation risks. . . .The most recent data indicate that the US net debt position expanded by an additional $291 billion to $2.6 trillion, or 25% of GDP, on a market-value basis at year-end 2002.
McCaughrin tells us not to worry, however, not because creditors will never grow reluctant to extend new funds to the US (which Paul Krugman argues they already have) or that they will begin to dump their US assets en masse. We need not fear because "while the US is now more beholden than ever to foreign capital, the day of reckoning may now be delayed, thanks to the positive effects of recent valuation adjustments."

As the General noted in the previous blog, the US dollar has been slowly and unsteadily rising against the euro all summer. The dollar is also up slightly against the yen since May and the Bush administration continues to publicly commit to a "strong dollar". As the European economy appears to weaken significantly, it seems impossible that the dollar will fail to rise as 2003 goes on. Perhaps the day of reckoning will not be postponed quite as long as
McCaughrin thinks.

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