One small but in my view important point about global finance. The US is the world’s big net debtor — with net external debt of around 50% of its GDP. Interest payments on that debt will thus rise in a high for longer world — but the process plays out somewhat slowly.
Let’s start with the basics — the US has borrowed over $20 trillion from the rest of the world ($21.5 trillion) and lent out $9 trillion (mostly in dollars). The net international investment position data reports that debt at market value, hence the 2022 dip.
The impact of the “mark to market” on foreign holdings of US bonds is especially pronounced in a chart of US external debt to GDP. the mark to market gains pulled net external debt under 50% of GDP, but hat will fade with time (bonds converge to par at maturity).
First order analysis would take the net debt position times the interest rate (basically the risk free rate, as the world holds a lot of Treasuries) to get expected net interest payments — i do this often in my own mental math. 50%*2 = 1 pp of GDP, 50% *4 = 2 pp of GDP.
The dynamics though turn to be more complicated — the US lends as well as borrows. It lends mostly in dollars it turns out (the US buys a lot of USD bonds from the Caymans for example), and its external lending tends to be fairly short-term.
US lending to the world has thus repriced more quickly than US borrowing from the world — the US is now getting 4% on average on its loans, while only paying 3% on its borrowing (mostly bonds).
the implied net interest rate on US external debt works out to be 2.4% — well below any current US interest rate. And as a result net interest payments as a share of US GDP are only up 15 bps of US GDP or so (not much really)
These predictable dynamics slow the adjustment in the U.S. balance of payments to higher interest rates, but they don’t eliminate it Net interest payments have a lot further to rise … They certainly will top their pre GFC peak as a share of US GDP (1.5% or so).
So there is a fair amount of bad news baked in to the US current account balance (an interest income shock of 0.5 to 1 pp of GDP) even in the trade balance stabilizes (as it has done recently, even with the strong dollar b/c of an inventory correction).
The IMF is forecasting that the US current account deficit will shrink — I am not — for the reasons outlined here … this is actually pretty predictable!