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Exorbitant privilege and the income puzzle in the U.S. How to gain investment income despite being in debt

For most of us, the returns we gain on our assets are typically lower than the interest payments we make on debt and liabilities. This applies to most countries, too. The U.S., however, is an exception: For the U.S., liabilities with foreigners greatly surpass U.S. assets and claims on foreigners. In other words, the U.S. net international investment position is currently negative and has been for a long time. However, net income received by the U.S. is positive, which is not what we’d expect. This rather puzzling feature of the data is referred to as the U.S. income puzzle.

FRED can illustrate this puzzle for us: In the graph, the blue line tracks the U.S. net international investment position, and the red line tracks the U.S. balance on primary income (or U.S. asset earnings less liability payments). Both are shown as a percentage of annual GDP. The red line shows that, despite having a negative investment position, the U.S. still has a positive income balance. In fact, as the investment position has worsened, the income balance has actually improved.

Research on this topic has identified that the U.S. income balance remains positive primarily because returns on U.S. foreign direct investment (FDI) in other countries and on foreign financial assets that the U.S. government and residents hold far exceed returns from foreigners’ FDI in the U.S. or their holdings of U.S. assets. Why? The U.S. dollar is the world’s reserve currency, which benefits the U.S., for example, in terms of low interest payments. And foreigners hold financial reserves in the form of high-quality assets to use as a buffer in case of financial distress. By and large, these high-quality, safe assets are denominated in U.S. dollars (for example, U.S. bonds), which are in high demand and pay relatively low returns. Economists have coined a term for this benefit the U.S. enjoys: exorbitant privilege.

How this graph was created: Search for U.S. net international investment position in FRED and plot the annual series. Click on the “Edit Graph” button and add to the line annual nominal GDP and then apply the formula a/b/10. The 10 allows you to express the result as a percentage (after adjusting the units). Select the middle menu to add a line and search for the U.S. primary income balance. Add the annual data series to the graph as a new line. Repeat the exercise of dividing the series by nominal GDP.

Suggested by Maximiliano Dvorkin and Hannah Shell.

View on FRED, series used in this post: GDPA, IEABCPIA, IIPUSNETIA

What is the federal government worth? More than is measured

The top graph shows federal government net worth, which looks like it’s plummeting and very negative. But before we scream in panic, let’s try to understand this a bit better. Over the time period shown, the economy, the population, and the price level have all increased. So let’s first adjust the series with one that takes all this into account: nominal GDP. The graph below shows this, and we now see that the net worth of the federal government is about minus three quarters of annual GDP. Still not so good. But is the federal government really in such a precarious situation?

To truly understand this measure, you need to go back to the sources—specifically the Z.1 Financial Accounts of the United States release, Table S.7.a, which at the time of this post ran from p. 176 to p. 178. The very last line is the series we show here. All that precedes that line are the elements that enter into the calculation, mostly financial debts and credits. This explains why the pattern of this series follows the series for the federal public debt. It includes some non-financial assets, such as structures, equipment, and intellectual property, but it does not include land, mineral rights, and the present value of future taxes. Any of these three missing elements in isolation would propel federal government net worth into positive territory. These items aren’t included here because it wouldn’t make sense in the context of the Integrated Macroeconomic Accounts (IMA, hence that label in the legend). But these items should be included to truly determine the full net worth of the federal government.

How these graphs were created: For the top graph, simply search for “federal government net worth.” For the bottom graph, create the first and then use the “Edit Graph” tab to add the GDP (nominal, not real) series to the existing line. Apply formula a/b/10 for the ratio we need, which adjusts the units and expresses the new series as a percentage.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: FGNETWQ027S, GDP

A single single-parent family in Loving County? County-level data on single-parent households with children

With help from the Census Bureau’s American Community Survey, FRED and GeoFRED let you display sociodemographic data, often at the county level. This maps shows the proportion of households with children that have single parents. Maps can be deceiving, though. For example, urban areas with dense populations make a different visual impact than counties with, say, a large desert. In addition, the latter have data that’s more likely to flicker from year to year due to small samples. Case in point for this map: If you are eagle-eyed, you’ll notice that one county shows 100%: Loving County, Texas, with a population of 82, likely included only one household with children in the 2013 to 2015 surveys. And that was a single-parent household. (From 2009 to 2012, Loving County had either 0% or no value for single-parent families.) While this is an extreme case, a similar story may happen in several other counties. After all, the American Community Survey is based on invitations sent to 1 out of every 38 households in the U.S. While this is an impressive sample overall, for small communities it can lead to non-representative pictures.

How this map was created: Go to GeoFRED and select the county maps. Look for “Single-Parent Households” in the dropdown menu.

Suggested by Christian Zimmermann.



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