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

Michael Shenk |

Research Assistant

Michael Shenk

Michael Shenk was formerly a research assistant in the Research Department of the Federal Reserve Bank of Cleveland. His work focused on international topics and housing-market indicators.

08.06.08

Economic Trends

The Net International Investment Position

Owen F. Humpage and Michael Shenk

The United States has run a current account deficit almost continuously since 1982. We have financed this deficit by issuing financial claims, such 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 them, or, in the jargon of international finance, the United States has maintained a negative net international investment position. Last year, that negative position reached a record $2.5 trillion.

These financial instruments give foreigners a claim on future U.S. output, so economists often gauge them as a share of GDP. Last year, our negative net international investment position reached 17.7 percent of GDP, down from a record 19.5 percent in 2002.

In addition to annual current-account deficits, 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 also resulted from the dollar’s depreciation. The dollar has depreciated approximately 26 percent on a trade-weighted basis against our key trading partners since early 2002. When the dollar depreciates, a fixed amount of foreign currency translates into a greater number of dollars. Because most U.S. claims on foreigners are denominated in dollars, a dollar depreciation increases the dollar value of U.S. claims on foreigners. On the other hand, that depreciation has little effect on the dollar value of foreign claims on the United States, which are typically denominated in dollars.

Valuation changes have had a profound effect on our net international investment position since the end of 2001: O ur cumulative current-account deficit has increased nearly $3.9 trillion, while our net international investment position has increased only $0.6 trillion. The difference primarily reflects valuation changes that work in our favor.

Reflecting the increased integration of global financial markets, both U.S. and foreign financial claims have increased much faster than U.S. GDP since the mid 1990s, especially since 2001. Contrary to reports that some foreign governments have been diversifying out of dollars, foreign official holdings of U.S assets have increased steadily by 5 percentage points since 2001. Official reserves accounted for 19 percent of foreign claims on the United States in 2007. U.S. holdings of foreign securities have also increased their share of total U.S. claims on foreigners in recent years ; they now account for 43 percent of that total. Direct investments, however, have been shrinking as a share of both U.S. claims on foreigners and foreign claims on the United States.