… is from page 83 of Daniel Griswold’s excellent 2009 book, Mad About Trade (footnote excluded):
It is misleading to refer to America’s negative net investment position [roughly, the accumulation of the years of America’s so-called “trade deficits”] entirely as debt. Debt is commonly understood to be a specific amount owed to another party, to be repaid with interest during a specific period. Most of the assets owned by foreigners are indeed debt instruments such as U.S. Treasury bills, corporate bonds, and bank deposits. But more than 40 percent are equity holdings, such as corporate stock, real estate, and direct investment. These holdings are not debt in any real sense. Americans are not obligated to repay anything. Although foreigners earn dividends and profits from those assets, they are not entitled to any fixed interest or repayment of principal. When foreign holders sell those equity assets, they will receive whatever the market price happens to be at the time of sale.
The fact – and, despite being widely misunderstood, this fact is quite straightforward – is that country X’s trade (or, current-account) deficit is not synonymous with increasing indebtedness of denizens, citizens, or taxpayers of country X. A part or even all of such a ‘deficit’ can become debt, but neither in principle nor in practice is any part of a trade deficit necessarily debt.
In this matter, the situation is exactly the same for country X’s trading partners as it is for families W, Y, and Z: If these families this year earn a total of $300,000 in after-tax income and spend only $$250,000 on consumption for themselves, they can lend some or all of the remaining $50,000 to others (who might or might not be those with whom they trade). These families can lend it to, say, merchant X in the form of their purchase of merchant X’s bonds. But they can – and very well might – also hold all of the $50,000 in cash. Or they might spend the entire $50,000 buying stocks – including shares in merchant X’s corporation. Or they might purchase real estate – including some land that merchant X chooses to sell. If and to the extent that these families use this $50,000 in any of these last three ways, they do not become anyone’s creditor and, hence, no one becomes their debtor.
