Summary of Key Points
This article discusses the imbalance in the United States' external economy, comparing the current situation with that before the 2008 financial crisis. It points out that although the U.S.'s net external debt (the amount it owes to other countries) has reached a record high, the reasons for this increase are different from those during the previous crisis. Half of the increase is due to a current account deficit (spending more than earning), and the other half is due to valuation effects (changes in asset prices or exchange rates). It is argued that while the level of net external debt should be considered, the more critical factor is the flow of the current account deficit, and the risks in the short term are manageable given the dominance of the dollar.
I. U.S. Net External Debt Hits a Record High, but It's Different from Before the 2008 Crisis
By the end of 2025, the U.S.'s net external debt will amount to $21.87 trillion, equivalent to 71.1% of its GDP, more than doubling from before the 2008 crisis. However, there are fundamental differences between the current imbalance and that period:
- Before 2008: The increase in net external debt was almost entirely due to a current account deficit (contributing 176.5%), indicating that the U.S. was truly overspending and its economic fundamentals were deteriorating.
- Now: The current account deficit only accounts for 51.5% of the increase; the remaining half is due to valuation effects (such as rising asset prices), meaning that the debt appears higher because of the increased value of assets, rather than actual additional spending.
In other words, before 2008, the U.S. was truly in debt, while now, half of the debt increase is due to these valuation effects.
II. Valuation Effects: The Major Factor Behind the Increase in Net External Debt
What are valuation effects? For example, if you buy foreign stocks for $1 million and the price rises to $1.5 million, your external assets have increased by $500,000—this change occurs without any actual transaction.
- Before 2008: The global financial crisis caused asset prices to plummet, reducing both U.S. external assets and debt, resulting in a negative valuation effect (which helped reduce the net external debt).
- Now: Global stock markets have risen (for instance, the S&P 500 has increased by 82.3%), and the value of U.S. stocks held by foreign investors has increased more than the value of U.S. assets invested abroad. This positive valuation effect has added $4.98 trillion to the net external debt (47.3% of the total increase).
This is like being owed $1 million, but since the value of the stocks you own has increased, the amount owed to you also seems higher on paper—although it doesn't mean you have actually borrowed more money.
III. Don't Worry! The U.S.'s Net External Debt Isn't as Dangerous as You Think
There are several reasons why we shouldn't be overly concerned about the U.S.'s net external debt:
1. Lack of International Standards: While a current account deficit exceeding 4% of GDP is considered a warning sign, there is no clear standard for how much net external debt is considered dangerous relative to GDP.
2. A More Relatable Measure: Using the ratio of net external debt to national net assets (rather than just net external debt to GDP) provides a more accurate picture. By the end of 2024, this ratio was -16.2% in the U.S., far lower than the seemingly higher figure of 75.5%.
3. Dollar Dominance: No other currency can replace the dollar in the short term, allowing the U.S. to repay its debt by printing money, preventing a debt crisis like those experienced by other countries.
4. Net Debt and Exchange Rates Are Not Closely Linked: For example, Japan has a net external asset position (it owes less to others), but the yen still depreciated by 33.6%. Similarly, although Indonesia's net debt decreased, its currency depreciated by 42.2%—the level of net debt does not directly affect exchange rates.
In other words, as long as the dollar remains the world's dominant currency, the U.S. can avoid a debt crisis simply by printing money.
IV. Investment Income Deficit: Not a Bad Thing, Maybe Even an Indicator of Attractiveness?
In the past, the U.S. earned income from its overseas investments (for example, by buying foreign companies for more than it sold them for). However, in 2024-2025, this has turned into a deficit (spending more than earning). The reasons include:
- Rising borrowing costs: Interest rates on U.S. debt have increased from 2.2% to 2.62%, while returns on overseas investments have only risen from 3.73% to 4%.
- Narrowing Interest Rate Gaps: A narrowing of the interest rate gap between direct and portfolio investments indicates a favorable investment environment for the U.S., attracting more foreign capital. For instance, foreign investors are willing to accept lower returns because of the strong performance of U.S. stocks.
If the U.S. investment environment improves in the future, foreign capital may flow out, causing stock prices to fall and reducing the value of U.S. assets held abroad, which could decrease net external debt and turn the investment income deficit into a surplus. Therefore, this is not a long-term risk.
Conclusion
Although the U.S.'s net external debt is high, much of it is due to valuation effects rather than a true economic deterioration. The dominance of the dollar protects the country in the short term. The key concern should be whether the current account deficit continues to widen. Ordinary people don't need to worry about a crisis triggered by the net external debt; the real risk lies in the flow of funds (whether the U.S. is spending too much) rather than the amount it owes.