Meet the Author

Owen F. Humpage |

Senior Economic Advisor

Owen F. Humpage

Owen Humpage is a senior economic advisor specializing in international economics in the Research Department of the Federal Reserve Bank of Cleveland. His current research focuses on the history and effectiveness of U.S. foreign-exchange-market interventions. In addition, he has investigated the Chinese renminbi peg, quantitative easing in Japan, and the sustainability of U.S. current-account deficits.

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Meet the Author

Margaret Jacobson |

Senior Research Analyst

Margaret Jacobson

Margaret Jacobson is a former senior research analyst in the Research Department of the Federal Reserve Bank of Cleveland.

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08.04.11

Economic Trends

The Net International Investment Position

Owen F. Humpage and Margaret Jacobson

The United States has run a current-account deficit almost every year since 1982, primarily because U.S. residents have imported more goods and services than they have exported. We finance this deficit by issuing financial claims—such things as stocks, bonds, and bank accounts—to the rest of the world. Since 1986, foreigners have held more claims on the United States than U.S. residents have held on the rest of the world, leaving the United States with—in econspeak—a negative net international investment position. These financial instruments give foreigners claims on future U.S. output, so economists often gauge them as a share of GDP. Last year, our negative net international investment position equaled 17 percent of GDP, the same as in 2009 but down from an all-time peak of nearly 23 percent of GDP in 2008.

The U.S. current-account deficit, which equaled 3 percent of GDP last year, has been narrowing from its peak of 6 percent of GDP in 2006. This has helped limit the growth in our negative net international investment position, but the current account is not the only factor in the mix. Besides the net issuances of new financial claims, year-to-year adjustments in the international investment position reflect changes in the valuation of previously issued, outstanding financial claims.

Valuation changes can result from movements in the market price of the underlying assets, but in recent years a substantial proportion of the valuation changes has also resulted from the dollar’s depreciation. The dollar has depreciated since its recent peak early 2002 by approximately 30 percent on a trade-weighted basis against a broad array of our key trading partners. When the dollar depreciates, a given amount of foreign currency translates into a greater number of dollars. Because many U.S. claims on foreigners are denominated in foreign currencies, dollar depreciations increase the dollar value of U.S. claims on foreigners. On the other hand, dollar depreciations do little to affect the dollar value of foreign claims on the United States because these are typically denominated in dollars. Absent favorable valuation adjustments, our negative net international investment position would reflect only our cumulative current-account deficit and would be substantially larger than it is today.

Despite 18 years of near-persistent current-account deficits and an associated negative net international investment position, the United States has—surprisingly—continued to receive more income on assets held abroad than we have paid out on foreign assets held in the United States. U.S. claims on foreigners have a higher average return than foreign claims on the United States.

The dollar value of each type of foreign claim on the United States has increased over the past decade along with the total, but the composition of the overall foreign portfolio has changed as well. Most notably, the share of foreign official claims on the United States has increased 12 percentage points, notably squeezing down the share of direct foreign investment. Likewise the dollar value of each type of U.S. claim on foreigners has increased. The compositional changes are not as dramatic, but the United States has reduced the share of bank claims on foreigners and nonbank claims on unaffiliated foreigners that it holds in its overall portfolio.