Research On External Adjustment Of U.S.External Liabilities

The United States is the country which has the most net external liabilities inthe world. This satiation calls the attentions about the problem about the liabilities ofthe U.S. despite the US foreign debt situation get worse. But the United States canrely on a variety of channels to "ease" the degree of deterioration in externalliabilities. How the United States can adjust its foreign debt externally is one of thetargets of this study. China is one of America’s most important creditors, and holds alot of dollar-denominated assets. In fact, for holdings the US dollar assets China hasto pay the "opportunity cost", while these liabilities is a "double-edged sword." to theU.S. This paper is divided into five parts to study these issues.The first part is introduction. This section describes the background andsignificance of the paper. In this part, the writer summarizes existing researches bothfrom "Flow adjustment" and "Stock adjustment". Also this part contains the paper’sframe structure, research methods, innovation and other issues are described.The second part focuses on the historical evolution of US foreign debt, thestatus quo and causes. The US external debt situation’s deterioration is closelyrelated to the deterioration of the US current account, especially trade accounts.Before the1980s, the United States did not appear long, sustained growing tradedeficits; America’s foreign debt problem had not surfaced. But with the increasing ofthe US trade deficit, the US international investment position continued todeteriorate, and eventually lead to people’s concerns. From the total point of view,the absolute amount of US foreign debt is sufficient to trigger fears. But the structureof US foreign debt, the US foreign assets in financial assets, especially the higher proportion of equity assets, the higher the proportion of foreign debt in the bondasset class, which led to the spreads between US foreign assets and foreign liabilities.To some extent, this can alleviate the problem of US foreign debt. The most directcause of the deterioration of the US foreign debt issue is the US trade deficit, it canbe found that there is a strong correlation between the trade deficits and theinternational investment position. In addition, the international status of the USdollar and the US dollar can also "facilitate" to adjust or increase in externalliabilities.The third part is mainly from two aspects to analyze the adjustments to the U.S.international investment position. They are “flow adjustment” and “stockadjustment”. The foreign trade deficit and financial account surplus could lead to thedeterioration of the international investment position. In simple terms, when thevalue of the dollar falls, it will lead to increase emports and reduce U.S. imports. Inorder to improve the international investment position, improving the currentaccount is very important, or at least slow down the pace of the deterioration.Conversely, when the dollar rises, the U.S. exports will be reduced and the importsincrease, this will expand the current account deficit, thus accelerating thedeterioration of the international investment position. In addition, in the UnitedStates relative to the global economy will also affect the flow adjustment ofAmerican foreign liabilities. When the domestic economy stronger, America’s importdemand will increase, then the U.S. trade deficit widened, which worsen theinternational investment position. On the other hand, when the U.S. economy isrelatively weak, the U.S. import demand will be reduced and exports increase,thereby reducing the current account deficit, the international investment positionconditions will be improved. In the stock adjustment, price changes and theexchange rate changes are important factors which can lead to changes in theinternational investment position. In price change factors, when the U.S. economy more positive relative to other countries, the United States in the foreign debtvaluation price change effect of FDI will be positive; U.S. stocks will have moregains. In this case, the U.S. foreign liabilities are deteriorating. On the other hand,when the U.S. economy is relatively weak, America’s U.S. assets held by the foreigninvestors will suffer relatively smaller valuation price change effect, even negative.At that time, it is helpful for the improvement of the U.S. foreign debt situation. Thedollar exchange rate changes will also lead the international investment positionadjustment.When the dollar devaluded, the United States foreign assets which are mainlydenominated in foreign currency will be relatively "appreciation". While quite aproportion of the debt is denominated in dollars, such as bond asset classes, theseassets directly by the dollar price, so does not directly affected by the dollarexchange rate changes. In addition, for the U.S., most of the foreign debts are in theform of bond asset. So when the dollar is strong, the currency valuation effect ofAmerican foreign assets will be adversely affected, thus accelerating thedeterioration of American foreign sheets. Vice versa.In the fourth part, the writer uses two methods to calculate the prospect of U.S.foreign debt. The first method is based on a simple calculation by historical data.Assume that for a period of time in the future, the trade deficit and the ratio of theGDP, foreign assets and foreign liabilities such as the spread between the key datafor1999-2013average. Results show that in the next few years, the state of the U.S.net international investment position will gradually tend to be better, and theabsolute value of the ratio of GDP will decrease gradually. The second method is touse the American foreign trade decision model which is expressed in character3andthe stock adjustment functions. The results show that the future of the U.S.’s netinternational investment position will continue to reduce in the absolute amount, andthe net the ratio of foreign debt to GDP will also continue to deteriorate. However, the ratio of the U.S. net liabilities to the GDP will eventually reach to60%at wherethe steady state will appear. The both methods show that the ratio of net foreign debtto GDP in the United States is not endless fester. The reason is that as the amount offoreign assets and foreign liabilities becoming larger and larger, the spreads betweenforeign assets and foreign liabilities will get bigger too. The result of method one ismore positive. The reason is that the data used in the method one is on the base ofthe average data from1999to2013. However, according to the EIU’s forecasts, theUnited States will enter the strong dollar cycle, and the economy will take the lead inrecovery, the growth rate will be higher than the average level of developedcountries such as Europe. The U.S. foreign debt will suffer adverse effects.The fifth part analyzes the situation of China’s foreign debt in the United States.China is holding a large number of U.S. dollar assets and the dollar bond occupies ahigh proportion. The U.S. investors can obtain higher earnings, and the yield ofChina’s holdings of U.S. assets acquired is relatively low. It can’t be denied that theU.S. assets hold by China suffered relatively small loess during the crisis because ofthe high portion of security assets. In the long term, however, the crisis periods areshort. So China pays a high opportunity cost for its U.S assets. For the U.S., the tradedeficit with China is huge. As a result, the financial account surplus injects capitalinto the United States that can help U.S. debt economy running continuously. Theamount of U.S. debt to China and the proportion is rising. So China leads to thedeterioration of the U.S. foreign debt situation. However, the bad impact from Chinato the United States foreign liabilities is short-term and on the accounting levels.China bought U.S. assets through "flow channels" mainly for bonds. However, thebond assets in the “stock adjustment” are not dominant. As a result, the assets heldby China increased the spreads between the United States foreign assets and foreignliabilities. So said China’s capital exports to the United States is a "double-edgedsword". At the current situation, the situation of United States foreign debt can’t be changed fundamentally. The large number assets held by China need to be adjustedin order to get rid of the risks.