Matthew Higgins and Thomas Klitgaard argue in Liberty Street Economics that the U.S. income surplus is shrinking

Matthew Higgins and Thomas Klitgaard argue in Liberty Street Economics that the U.S. income surplus is shrinking

Matthew Higgins and Thomas Klitgaard published this analysis on May 18, 2026, in Liberty Street Economics. They trace the shrinking U.S. income surplus to higher interest rates after the pandemic and continued sales of U.S. assets to foreign investors. Although U.S. holdings abroad are smaller than foreign holdings in the United States, income from foreign direct investment and portfolio equity has helped offset a persistent deficit on interest-bearing assets. The authors say higher interest rates increased net interest payments, bringing the income balance close to zero in 2024 and 2025. They argue that the need to sell U.S. assets to finance trade deficits means payments flowing abroad are likely to mount. A larger gap between U.S. assets and liabilities in interest-bearing assets also makes the income balance more sensitive to rate changes: the authors estimate that a one percentage point rate rise would subtract $150 billion from it. They note that one percentage point fall would bring a similar improvement. The authors do not resolve whether the U.S. advantage in foreign direct investment returns reflects a statistical illusion or corporate tax strategies. How will changes in interest rates affect the U.S. income balance as its net liabilities grow?

Publication: 717425fb-93ad-c2ac-3cf3-df7092bcac2e

attribution — pass: The reading correctly attributes the analysis to Matthew Higgins and Thomas Klitgaard in the Federal Reserve Bank of New York's Liberty Street Economics. It keeps their conclusions as the authors' arguments and estimates. The source is a single analytical post, not a listing.

Matthew Higgins and Thomas Klitgaard

summary — uncertain: The reading is faithful, but its central terms are left unexplained and no definitions are supplied. It never says that the 'income surplus' means U.S. receipts of profits, dividends and interest from abroad exceeding payments to foreign investors. It also does not explain 'foreign direct investment', 'portfolio equity' or 'interest-bearing assets'. A non-specialist may not follow the mechanism. Smallest repair: add a plain-language gloss of the income surplus, and add term-library entries for the other terms. The closing question also repeats verbatim inside the summary.

Yet U.S. investment income receipts—in profits, dividends, and interest—comfortably exceeded income payments until recently.

date — pass: May 18, 2026 matches the source dateline and the UTC day of originalPublished. The page is a publisher page, not an archive copy. The authors' expectation that the servicing burden will mount is presented as their forecast. Related-story links on the page are not used.

May 18, 2026

support — pass: Each claim is supported by the source text: the causes of the fading surplus, the -$450 billion interest balance, the near-zero balance in 2024 and 2025, the servicing-burden forecast, the $150 billion rate sensitivity with a symmetric fall, and the unresolved debate over FDI returns. The question follows from the conclusion and is not a leading claim. Grounding in the source does not independently verify the figures.

This increase in interest payments accounts for the shrinking of the U.S. income surplus.

media — pass: No media is selected and no verified media candidates were supplied, so there is no misidentified or irrelevant media.