U.S. Foreign Debt Shows Its Teeth as Rates Climb

Americans have enjoyed being the biggest consumers within the last decade. They have bought up foreign goods with foreign credit. Recently, they are being pressed to change their spending habits and start paying off their debt. With American’s trade deficit and foreign debt, the recent rise of interest rates have brought concern to a problem that has been persisting for over a decade.

Trade deficit occur when countries consume more imported goods and services of more monetary value than the amount which they export. For example if 2024 the United States exports $2 trillion worth of goods and services and imports $2.76 trillion worth of goods and services, the results would be a $760 billion trade deficit. Trade deficits are a problem that is solved by increasing exports and decreasing imports. Another option would be to use reserves to compensate for the deficit, but they will inevitably run out. America’s pseudo solution to the problem was to look to foreign investors to support its rapid expansion.

“The U.S. trade deficit is the result of a net inflow of capital to the United States from the rest of the world. Because of the United States stable and relatively free domestic market, America remains the world's most popular destination for foreign investment. America has become a net importer of capital because Americans do not save enough to finance all the available investment opportunities in their economy. This inflow of capital from abroad allows us to pay for imports over and above what we export. In other words, the trade deficit is simply a mirror reflection of the larger macroeconomic reality that investment in the United States exceeds domestic savings. If we want to change the U.S. trade deficit we must change the rate at which Americans save and invest.”

On the other hand, foreign debt or external debt is that part of the total debt in a country that is owed to creditors outside the country. The United States of America has an estimated foreign debt of over 2.5 trillion dollars.

“The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the IMF and World Bank. Generally foreign debt is classified into four heads i.e. (1) public and publicly guaranteed debt, (2) private non-guaranteed credits, (3) central bank deposits, and (4) loans due to the IMF.”

These two concepts, trade deficit and foreign debt are interrelated; with some economic policies, like America’s, having a trade deficit ultimately leads to foreign debt. This occurs because for the country to maintain a level of high consumption with an unbalance in trade it must seek outsides funds once its reserves are depleted. The United States must borrow the necessary funds to sustain the level of supply of the goods and services demanded by consumers. Having extreme foreign debt reduces the confidence other countries have in a countries currency. This decrease in confidence then leads to a decrease in the value of the currency, which results in the country having to spend more for the same amount of goods and services. The vicious cycle is complete when the loss value in currency further contributes to the trade deficit, this leads to more borrowing.

A Trade deficit occurs when a country imports more than it exports. This problem is sometimes remedied by using reserves to cover the difference and attempting to decrease exports and increase imports. The US has chosen to borrow foreign funds to cover their trade deficit. Foreign debt contributes to trade deficits because as foreign debt increases the confidence in the currency decreases. This means that the US will be able to afford fewer imports and increase the trade deficit. The relation ship between trade deficit and foreign debt has a snowball affect on economies. The problem only can be remedied by either increasing exports or by decreasing imports this will free capital for the purpose of paying off debt.

The recent increase in interest rates has also increased the installments America must pay to its foreign debtors. This has also widened the gap between America’s incoming debt installments and its outgoing ones. Simply put America must work harder or cut back on non-vital expenditures in order to maintain a consistent standard of living. Although America is the prime country for foreign investment, many countries are slowly losing confidence in its ability to pay of its debt. America’s neglect of its foreign debt may lead to a negative effect on its currency.

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