Foreign Ownership of U.S. Safe Assets: Good or Bad?

The last 20 years have been marked by a sharp rise in international demand for U.S. reserve assets, or safe stores-of-value. We argue that these trends in international capital flows are likely to be a boon for some (by a lot) but a bane for others (by less). Conversely, a sell-off of foreign government holdings of U.S. safe assets could be tremendously costly for some individuals, while the possible benefits to others are several times smaller. In a general equilibrium lifecycle model with aggregate and idiosyncratic risks, we find that the young and oldest households are likely to benefit substantially from a capital inflow, but middle-aged savers may suffer because they are crowded out of the safe bond market and exposed to greater systematic risk in equity and housing markets. In some states, the youngest working-age households would be willing to give up 0.20% while the oldest retired households would be willing to give up over 1% of lifetime consumption in order to avoid just one year of a typical annual decline in foreign holdings of the safe asset. By contrast, middle-aged savers could benefit from an outflow. Under the veil of ignorance, a newborn in the lowest wealth quantile would be willing to give up 2.7% of lifetime consumption to avoid a large capital outflow.