Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

The holdings abroad need to be divided into two basic categories, one of which is the net foreign direct investment story and the other is the portfolio—that is, stocks and bonds and bank claims. What you’ve described has characterized the foreign direct investment portfolio. We have, on average, earned higher rates of return on our holdings of foreign direct investments than foreign investors in the United States have earned on theirs. That has been a big source, and will continue to be a big source, of net positive income into the U.S. current account. It is ironic that we’ve become the world’s biggest debtor and nonetheless we’ve actually been recording, at times, positive income flows. That is because much of the bond portfolio is dollar-denominated. There are very few—some, but not a lot—foreign-currency- denominated bonds issued by U.S. corporations; they are mostly dollar-denominated bonds. And interest rates on those have been quite low. So even though the position has deteriorated— basically, rather severely—from 1995, the net income actually stopped deteriorating and was quite flat for a while, owing to the low interest rates. In principle, if the interest rates were actually zero, one could see that that whole part of the portfolio wouldn’t matter at all. So the notion that we earn more on direct investment is still present in the data and in our forecast. But as we apply somewhat higher interest rates to the bond part and the bank deposit part, we finally see the consequences of being a big net debtor starting to overwhelm this direct investment portion of the position.

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