By Tyler Durden
Submitted by Benn Steil and Emma Smith via The Council on Foreign Relations,
The so-called Exorbitant Privilege of the United States, the power to conjure the world’s primary reserve currency, is reflected in the unique combination of being deeply in debt to the rest of the world (that is, having a massive negative net international investment position, or NIIP) while earning far more income abroad than it pays out in interest (that is, having massive positive annual net investment income, or NII). The U.S. NIIP averaged negative $7.5 trillion over FY15/16, while its NII was positive $167 billion, as shown in the top left of the graphic below. Basically, foreigners are willing to accept a trivial return to hold dollar-denominated assets.
Far less well known is the mirror-image of the Exorbitant Privilege, or what we might call the Exorbitant Detriment.
It is, not surprisingly, borne by China. It is, to some extent, the price the country bears as the world’s largest holder of dollar-denominated central bank reserves. Reserves account for half of China’s foreign assets, of which around 40 percent are invested in low-yielding U.S. Treasury securities. But it also reflects the fact that China is …read more