Record US foreign debt will mean belt tightening in the 1990s. Though the situation is severe, it is nothing like Latin debt picture
At the turn of the last century, the United States found itself heavily in debt to British bankers who financed the westward expansion of the railroads. By 1893 the financial system unraveled with a stock market crash. Yesterday, the Commerce Department reported America's foreign debt had soared by 36.8 percent from 1986 to $368.2 billion in 1987. This increase meant the US owed foreigners more money than any other time in its history.
``Ronald Reagan has brought us back to the days of Grover Cleveland,'' says David Hale, an economist with Kemper Financial Services in Chicago.
Well, maybe not quite that far. But, as Mr. Hale and other economists are quick to point out, the implications of the soaring US debt burden are not good. Ultimately, the US must begin to divert its income to pay the interest on this debt. ``We will be compromising the 1990s,'' Mr. Hale says.
The quick analogy for many analysts is to compare the US debt load with that of the three big Latin debtors: Argentina, Mexico, and Brazil. The US debt load is now higher than those three combined.
The US economy, however, is much larger than these three countries. Thus, the US debt as a percentage of its gross national product - or output of goods and services - is only about 10 percent. By way of contrast, Australia's foreign debt is 35 percent and Ireland's is over 100 percent.
The US also differs from the Latin countries in that not all of the debt is loans. A significant part of it represents claims foreigners have from buying US companies or real estate. In addition, the US debt is in dollars. While other debtor nations must sell goods to raise dollars to pay off their debt, ``We don't have any trouble getting the foreign exchange, we just print the money,'' explains economist Robert Dederick of Northern Trust Bank in Chicago.
Foreign debt occurs when foreigners find it more profitable to invest in other countries rather than in their own. This trend is now taking place in the US where Japanese investors are gobbling up real estate in Hawaii as well as US Treasury bills. The US itself is still a pretty big investor abroad, buying up $1.17 trillion of assets last year.
In fact, many economists argue that the debt picture is distorted because the US values its investments overseas at the original cost. ``Our assets are grossly undervalued,'' Mr. Dederick says, ``our true net position is not as disturbing as the numbers suggest.''
For example, if IBM made an investment in Europe of $1 billion in the 1960s, it would still be valued at $1 billion. But the chances are good the investment has grown considerably.
Of greater importance to the nation is the question of what it has done with the money it has borrowed. In the 1880s, the money was invested in the young nation's infrastructure. In short, it was put to a productive use.
Now, it appears that a significant portion of the foreign loans are going to help fund consumption, and the federal budget deficit. In short, economists say savers in Japan and Europe are helping to fund an inflated standard of living here.
The debt trend is expected to continue for the next several years. Hale predicts it will peak in the early 1990s when the debt hits 21 percent of the GNP.
One solution to the problem would be for the US to change its spendthrift ways and begin saving more money. Thus, it would rely on foreigners less to fund its budget deficits and provide the capital for new factories.
But shifts in spending habits take a long time to change.
The US solution in the 1890s was simply not to repay its debts. Now, Hale explains, the US has floating exchange rates. And, as foreigners are aware, there is always the danger a US Treasury secretary will take the easy route sometime - devaluing the dollar and their holdings.