Redistributive policy

The net foreign position of the United States

The End of Privilege: A Reexamination of the U.S. Net Foreign Position

A country’s net international position measures the value of all assets that residents own abroad minus the value of assets that foreigners own in the country. This is an important statistic because all other things being equal, a higher net international position means that a country can expect higher future net income from abroad and can therefore plan for trade deficits. more important future. A common way of decomposing changes in the net external position is to recognize that the position may improve because a country, net, acquires additional foreign assets – that is, it runs a current account surplus – or because the market value of existing assets held abroad increases relative to the value of foreign assets in the country.

The United States has long had a negative net external position. But until 2007, it was relatively low, never exceeding 20% ​​of US GDP. In fact, the position was surprisingly weak given the US history of large and persistent current account deficits. In influential papers, Gourinchas and Rey (2007, 2014) have highlighted the importance of valuation effects in shaping the dynamics of the net foreign position of the United States. As they wrote, these revaluations seemed to be constantly shifting in favor of the United States, especially in the mid-2000s. The net effect was that the United States seemed to enjoy the special privilege of being able to constantly borrow without going into debt. heavily. Gourinchas and Rey and others argued that this privilege reflected an asymmetry in portfolios between countries, with Americans holding many direct investments and portfolio assets abroad – the value of which tended to increase over time – while US liabilities consisted disproportionately of low-yielding US government bonds. .

Our article (Atkeson et al. 2022) updates the history of the net international position of the United States, using data collected by the United States Bureau of Economic Analysis and the United States Treasury in the United States Financial Accounts. We see that a lot has changed over the past 15 years. First and foremost, the US net external position has deteriorated very sharply, from minus 5% of US GDP in 2007 to minus 65% of US GDP in the third quarter of 2021. Such a large negative net position is unprecedented . What caused this decline? What are the social implications for Americans?

We start by showing that the decline in the US net international position over this period is mainly due to valuation effects, with current account deficits playing a minor role. In fact, these valuation effects are so large that the US net position is more negative at the end of 2021 than the sum of all US current account deficits since 1992 (see Chart 1). That’s why we call our article “The End of Privilege”.

Figure 1 The U.S. Net International Position (NFA), Cumulative Current Account (CA) Deficits, and Cumulative Valuation Effects (VA)

Next, we dig into the source of these valuation effects. We find that valuation effects have lowered the net foreign asset position of the United States because the value of foreign assets in the United States has risen rapidly. This may come as a surprise to readers who have the impression that the United States operates like a hedge fund, borrowing abroad in the form of stable-value Treasury bonds and investing abroad in similar volatile investments. to shares. But the financial accounts of the United States show that this stylized view of the United States’ international investment position is becoming increasingly obsolete. In particular, in the period following the Great Recession, equity holdings held by foreigners in the United States are large and their value is similar to that of equity assets held by Americans abroad (chart 2). The U.S. Bureau of Economic Analysis estimates that the value of these foreign holdings has jumped over the past 15 years, paralleling the dramatic rise in the U.S. stock market over that time. At the same time, the value of assets held by the United States abroad rose much more slowly, as foreign stock markets massively underperformed the United States (Chart 3). Thus, the market value of US foreign liabilities increased much faster than the market value of US foreign assets, which depressed the net foreign position of the United States.

Figure 2 Foreign assets and liabilities of the United States as a percentage of GDP

figure 3 Stock indices for the United States and for the world outside the United States, in dollars and local currencies

So far, we have only done simple accounting. Our next objective is to address the welfare implications of the decline in the net position of US foreign assets. To do this requires a model in which we can simulate shocks that increase the value of US assets. Farhi and Gourio (2019) develop a tractable macro asset valuation model that can be used as an accounting framework to trace the contributions of various possible asset revaluation factors. They explore the relative roles in long-term macroeconomic and asset valuation trends of (1) changes in firms’ market power, (2) changes in the importance of intangible capital, and (3) changes in risk premiums. Greenwald et al. (2022) conduct a similar exercise. They conclude that the most important driver of the rise in US stock values ​​between 1989 and 2017 was a series of factor share shocks that reallocated output to shareholders at the expense of workers.

In our article, we extend a model similar to those of Farhi and Gourio (2019) and Greenwald et al. (2022) in an international framework, so that we can explore differential asset pricing dynamics across countries and their implications for the current account and net international position. In our model, firms in each country produce differentiated varieties. Each variety can be produced by a more productive “leader” firm, or by a fringe of less productive potential competitors. In equilibrium, leading firms engage in price limits, setting margins as high as possible while preserving their production monopoly. We use the model to explore two different possible drivers of US-specific asset value increases.

The first hypothesis we consider is that the productivity differential between leading and following firms has increased in the United States – but not in the rest of the world. This leads to higher US profit margins, US monopoly profits, and US corporate values. From the perspective of business owners, the jump in corporate values ​​appears to be an unanticipated windfall in excess return on equity. And if those owners are overseas, the shock involves a permanent increase in the share of US income accruing to foreigners. Thus, in this model, the decline in the net foreign position of the United States reflects a redistribution of income from Americans to foreigners. We argue that this model of corporate values ​​is consistent with two key empirical facts. First, this is consistent with the fact that corporate payments measured in relation to GDP have increased markedly in the United States over the past few decades, unlike payments in other countries (see Figure 4). Second, the model is consistent with the fact that US current account deficits have generally been modest in the period following the Great Recession.

Figure 4 Business Payments in the US and EU

We also consider an alternative hypothesis of rising US asset values, namely that production has become more intensive in forms of capital that are poorly measured in the national accounts. Under this assumption, the value of the US stock market has increased because US (but not foreign) companies have undertaken many investments in unmeasured intangible forms of capital. Along a balanced growth trajectory, it turns out that higher markups relative to more intangible capital models are observationally equivalent. But in our open economy context, the two models exhibit very different dynamics in the transition from one balanced growth path to another. In particular, if unmeasured capital becomes more important, the model predicts a period of very large (and counterfactual) current account deficits, as the United States borrows to invest. Since valuation gains reflect new accumulation of capital, there are no windfall gains for foreign owners of US companies – whoever finances the unmeasured investment reaps future returns from that capital.

In conclusion, the growing diversification of international equities has created powerful new channels for shocks to propagate beyond national borders. The surge in US equity values ​​against a backdrop of significant foreign ownership of US stocks has led to a collapse in the net foreign asset position of the United States. Financing this net debt to the rest of the world expects the United States to run larger trade surpluses in the future. Our favorite interpretation of the surge in US stock values ​​is that US companies have unexpectedly become more profitable, unlike foreign companies. In a closed economy, this shock would be redistributed to American business owners at the expense of American workers. In our open economy model, the situation for Americans is worse: much of the income lost by American workers goes to the foreign owners of American companies. Nevertheless, this reallocation could be efficient from an ex ante point of view. A key open question here is whether profits are rising in the US due to the growth of highly productive US superstar firms (Baqaee and Farhi 2017), or because US markets are becoming less competitive (Philippon 2020). In the first case, the shock is basically good news for Americans, and overseas transfers could be effective. The second scenario, on the other hand, is shocking bad news for the United States, and higher transfers abroad make a bad situation worse.

References

Atkeson, A, J Heathcote and F Perri (2022), “The End of Privileges: A Reexamination of the U.S. Net Foreign Asset Position”, CEPR Working Paper 17268.

Baqaee, D and E Farhi (2017), “Overall Productivity and Rising Margins”, VoxEU.org, 4 December.

Farhi, E and F Gourio (2019), “Accounting for macro-finance trends”, VoxEU.org, 10 March.

Gourinchas, PO and H Rey (2007), “International Financial Adjustment”, Journal of Political Economy 115(4): 665–703.

Gourinchas, PO and H Rey (2014), “External Adjustment, Global Imbalances, Valuation Effects”, in Gopinath, G, E Helpman and K Rogoff (eds), Handbook of International Economics, vol. 4, edited by. North Holland, 585–645.

Greenwald, D, M Lettau and S Ludvigson (2021), “How the Wealth was Won: Factor Shares as Market Fundamentals”, NBER Working Paper 25769.

Philippon, T (2020), “The great reversal”, VoxEU.org, 12 June.