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(9) FX Theory: Wealth and Net International Investment Position

The availability of funds – wealth and the net international investment position (NIIP) – are one of the five key indicators for FX rates. Often currencies of countries with a high availability of funds appreciate when markets decline. In our overview post  “What determines FX rates?” we indicated that the financial position of the concerned country and the availability of funds are one of the five key indicators for foreign exchange rates. We divide the financial position into the following components:

  1. Net Worth or Wealth
  2. Net International Investment Position

Net Worth and Wealth


US household net worth 1952-2012

US household net worth 1952-2012 - Click to enlarge

Net worth, or net wealth, is the difference between assets and liabilities for a person or a state/government. The development of private net worth in the United States is highly dependent on real estate and stock market developments, as the following chart shows.

Wealth Income Ratios 1900-2010

Click on image to expand

The same development is visible in other nations: since the 1976, and for France since 1950, wealth to income ratios have been rising. In countries like Italy and France private wealth strongly increased, in particular from the euro introduction on, when under the influence of cheap central bank rates house prices heavily improved.

Private Wealth vs. Government Wealth 1970-2010 Picketty

click on image to expand , source Prof. Picketty, University of Paris

On the other side, government wealth +declined: in Italy from 20% in 1970 to -70%, in Japan from +120% in 1990 to close to zero today.

The following is a wealth decomposition for financial assets. As opposed to other countries, Americans and British prefer to invest their financial wealth more in shares and equities.

Wealth By Asset Class Europe Japan United States

Wealth By Asset Class Europe Japan United States - Click to enlarge

Wealth in form of asset prices is just an accounting entry that moves up and down with central bank policy. Higher mortgage and interest rates leads to falling, lower ones to rising asset prices. The net international investment position often shows more stability and is more resistant to central bank manipulation.

Read on the next page about the net international investment position

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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