The U.S. has long held an external balance sheet that is comprised of foreign equity assets, mainly in the form of direct investment (DI), and liabilities held abroad primarily in the form of debt, including U.S. Treasury securities. This composition is known “long equity, short debt.” Pierre-Olivier Gourinchas of UC-Berkeley and Hélène Rey of the London Business School claim that this allocation has allowed the U.S. to serve as the “world’s venture capitalist,” issuing short-term debt in order to invest in high-yield assets. But the U.S. direct investment position has changed from a surplus to a deficit, with uncertain consequences for the international monetary system.
There is more than one reason for the change. To see this, it is important to understand that the U.S. Bureau of Economic Analysis, which reports these data, uses several methods to value direct investment. One of these utilizes stock market prices to calculate the market values of the assets and liabilities. The second method is the use of the historical costs of the investments when they were made. The third is the current, or replacement, costs of the direct investment assets and liabilities.
Direct investment includes equity and debt instruments. The latter is based on intra-company borrowing. Historically, the equity component has registered a net positive position that outweighed the negative debt position. But the net direct investment equity position, which had been falling for several years, plunged in late 2017. The falloff continued in 2018 and led to a negative balance, which combined with the negative net direct investment debt position, turned the overall net direct investment balance negative.
Interesting paper but no mention of the Dark Matter debate? As a small sampler – check out this Mark Thoma classic:
China’s Dark Anti-Matter:
I am not going to digging through FRED or whatever so am relying on memory and have not looked at these numbers for several years, but my memory is that for quite a long time the net creditor-debtor international position of the US has been that we have been a net debtor, and that this is not something that just happened last year. A majjor part of that has been the massive amount of US Treasury securities held abroad.
However, and here I do not know the most recent numbers and this may be where the shift has happened, we maintained a surplus on the income flow part of the capital account despite being a net debtor. You actually lay out why that has been the case. Foreigners have held securities paying low interest, while much of US assets have been equity with high yields. Has this turned around?
I have notified Joseph that he has comments.
1. I think the “dark matter” hypothesis has been disproved.
2. The U.S. has been an international debtor since the Reagan administration, when the fiscal deficit rose and overall savings declined.
But within the overall external balance we have had until now a surplus position in FDI.
3. It is not clear how this change will affect investment income. According to the BEA, in 2019:Q1 “Primary income receipts increased $5.3 billion to $281.8 billion, primarily reflecting increases in direct investment income and in other investment income.”
If the change in the U.S. position is only due to valuation changes, income should not change very much. But if the U.S. does disinvest, then there most likely would be a decline in earnings.
According to Survey of Current Business the net asset balance of the US remained positive to the end of Reagan’s presidency on measures based on historical cost, current cost, and market value. The first to turn negative was the historical cost measure, which turned negative in 1989, the year Reagan left office. The other two measures were still positive.
Digging to find net capital income flow balances has proven frustrating, with several FRED series related to this discontinued. It appears the measure was still positive as of about four years ago, but declining.
Anyway, your post was confusingly written, and I do not think you have your story straight. Sorry.
Barkley –try talking to BEA economist again. You can download almost every BEA historical series directly from the BEA.