… is from page 179 of David Friedman’s superb 1996 book, Hidden Order:
A capital inflow occurs because foreign investors can get a higher real interest rate here than at home. If the reason the interest rate is high is, as sometimes asserted, that Americans have become increasingly impatient, unwilling to give up present utility for future utility, then it is a symptom of a change that will ultimately make us poorer – we are living on future income and some day the bill will come due. If the reason is that American firms have lots of good investment opportunities, and are therefore happy to offer higher rates than Japanese firms, the bill will still come due, but we will have the returns from those investments to pay it with.
DBx: Yes.
Note that Friedman here writes only of foreign investments incoming to the U.S. made as loans to Americans. Many other foreign investments incoming to the U.S. are not loans; on these investments, nothing ever need be paid back by Americans. An example is a German company building and operating an automobile-producing factory in South Carolina. The shareholders of this firm of course expect to profit, but if the firm fails, the losses are borne by that company’s shareholders and not by Americans. And if that firm succeeds, the positive returns to the shareholders are newly created wealth that would never have existed absent this investment. These returns, in essence, are paid by these shareholders to themselves (despite the fact that international commercial accounting creates the appearance that these returns to foreigners are paid by Americans).
