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.