(9.1) Net International Investment Position

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George Dorgan
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The difference between foreign assets – assets held abroad by locals – and foreign liabilities – local assets held by foreigners – is called the net international investment position (NIIP). Similarly, net worth, the NIIP, is dependent on the development of markets, in particular for countries like Switzerland that exhibit a strongly positive NIIP.

Net International Investment Position in % of GDP, source IMF

The NIIP sums up the balance of payments for each year.

Due to continuing current account deficits the NIIP of the United States, was getting more and more negative.

The following table shows the cumulated current account surpluses, which is mostly in line with the NIIP.

The Valuation Effect on the NIIP

The net international investment position can change for two reasons. One is deficits or surpluses in the current account, which imply, respectively, net international purchases or sales of assets. The other source of changes in

the NIIP is changes in the price of the financial instruments that compose the country’s international asset and liability positions. So we have that

∆NIIP = CA + valuation changes1

Many more details about it can be found at the Cleveland Fed:

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.

The researchers show that between 2000 and 2010, U.S. investments abroad had an increasing percentage of direct investments and securities, while claims on the U.S. rose particularly by foreign central banks (the dollar as a reserve currency). Since the former had a higher yield than the latter, the Americans managed to increase more and more the net income receipts.

source Cleveland Fed

The sharp deterioration of the American NIIP since 2010, can be explained by three reasons:

1. Continuing U.S. current account deficits – albeit less than until 2007
2. A recovery of U.S. asset prices compared to foreign ones (in particular stocks of emerging markets were falling, American ones were rising) and therefore a stronger valuation of the position of American creditors.
3. Only to a limited extend the relatively small appreciation of the dollar until 2013.

Read on the next page about the net international investment position of the United Kingdom.

1. Columbia University. “International Macroeconomics”, Stephanie Schmitt-Groh Martın Uribe, April 26, 2013, Online Link [↩]

About George Dorgan

George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on SeekingAlpha.com and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.

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