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Of Debt and Detriment

Authors: Benn Steil, Senior Fellow and Director of International Economics, and Emma Smith, Analyst, Center for Geoeconomic Studies
February 13, 2017
Weekly Standard

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It is the exorbitant privilege of the United States that it can conjure the world’s primary reserve currency, Valéry Giscard d'Estaing, then French finance minister and later president, remarked half a century ago. This privilege, maintained as the dollar took the place of gold, allows the United States to be deeply indebted to the rest of the world while earning far more income abroad than it pays out in interest. Less well known is the mirror image of the exorbitant privilege, what we call the exorbitant detriment. It is, not surprisingly, borne by the world's largest holder of U.S. debt: China.

Having run persistent current account deficits since the early 1990s, the United States has accumulated a net debt to the world of $7.8 trillion. China, by contrast, is the world's largest net creditor, to the tune of $1.7 trillion. We would expect countries that are net debtors to pay out more income than they receive, and those that are net creditors to earn more income than they receive—and, indeed, this holds for most of the world. But for the United States and China, the opposite is true. Despite its vast debt, the United States earned $180 billion more in foreign investment income over the year to September 2016 than foreigners earned on U.S. investments. China, on the other side, paid out $50 billion more to foreigners than it received.

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