The United States has long enjoyed what was once called the “exorbitant privilege” of borrowing at favorable rates due to the dollar’s status as a global reserve currency. This privilege has helped finance the U.S. trade deficit, with net income from foreign investments averaging 1.2 percent of GDP annually in the decade before the pandemic. However, this dynamic shifted in 2024 when the U.S. recorded a negative net return on foreign investments for the first time since at least 1960, raising concerns about the sustainability of this advantage.
The U.S. current account, which measures net foreign income, is influenced by net exports, primary income (dividends and coupon payments), and secondary income (unilateral transfers like foreign aid). While exports and imports have remained relatively stable, primary income has declined sharply since peaking at 1.4 percent of GDP in 2018. This decline has contributed to a larger current account deficit, with annual borrowing from the rest of the world now close to 4 percent of GDP, the highest since 2008.
Despite holding a negative net foreign asset position since the 1980s, the U.S. has historically earned a positive net primary income. This is due to higher yields on foreign equity assets compared to the yields paid on U.S. equity liabilities. However, the net equity position turned negative in 2018, and the yields on debt securities have increased rapidly since 2022, further pressuring the U.S.’s ability to maintain its “exorbitant privilege.”
The combination of declining net equity positions and rising debt yields has led to a significant drop in net primary income. About 0.9 percentage points of this decline is attributed to lower primary income from equity assets, while 0.6 percentage points reflects reduced primary income from debt assets. As these trends continue, the U.S. may find it increasingly difficult to sustain the favorable borrowing rates that have long been a hallmark of its economic strategy.