The United States International Asset and Liability Position: A Comparison of Flow of Funds and Commerce Department Presentations

International Finance Discussion Papers Number 295

November 1986

THE UNITED STATES INTERNATIONAL ASSET AND LIABILITY POSITION: A COMPARISON OF FLOW OF FUNDS AND COMMERCE DEPARTMENT PRESENTATIONS

by

Guido E. van der Ven and John F. Wilson

NOTE: International Finance Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to International Finance Discussion Papers (other than an acknowledgment that the writer has had access to unpublished material) should be cleared with the author or authors.

Abstract

' This paper presents a detailed description of how the Flow of Funds' foreign sector asset and liability account is derived. The Statistics found in the Flow of Funds' (FOF) foreign sector are related to the Commerce Department's U.S. International Investment Position (IIP) tabulation; a survey of information sources for the foreign sector shows how these data are largely reconcilable with the Commerce Department 's IIP. A second section of the paper, based on these statistics, offers some observations about recent developments in the United States' net

international investment position.

The U.S. International Asset and Liability Position Guido E. van der ven and John F. Wilson*/

The Commerce Department's Bureau of Economic Analysis reported in June 1986 that, as of year-end 1985, the United States' net international investmeat position was a negative $107 billion. This was the first time the United States had reported a negative investment position with the rest-of-the-world since these statistics were first systematically compiled beginning in 1919. The swing of this balance into a negative position came as no surprise, given the rapid expansion of the U.S. current account deficit, from near zero in 1981/82 to $118 billion in 1985, but the magnitude of the resulting position at end-1985 was larger than some observers had anticipated. On current trends, these negative results likely will rise to much larger values in the next few years, and the role of the United States as an “international debtor" is now drawing media and political attention.

The official tabulation of the U.S. International Investment Position (IIP) is published once a year in the Survey of Current Business 1/ and, along with the quarterly Balance of Payments (BOP) statistics, has served as the main data source on this topic. Users of the Federal Reserve's Flow of Funds (FOF) statistics watch fundamentally the same data as are embedded in the Commerce accounts.

Experience has shown that many users of the Flow of Funds are unaware that the foreign sector data in these accounts are largely reconcilable with the Commerce Balance of Payments statistics, even though individual line items may be different. To clarify the links between the two flow accounts, a recent paper by one of us, “The Foreign Sector in the Flow of Funds Accounts," gave a full statement of the data sources and calculation methods for the FOF foreign sector as they relate to the

Balance of Payments statistics.2/ The more recent concern with the U.S.

.

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International Investment Position provides a convenient opportunity to expand the earlier effort into the realm of outstandings. The initial port:ion of this paper, therefore, will display and discuss an expanded version of the foreign sector as it appears in the Flow of Funds annual publication, Financial Assets and Liabilities 3/ and its relation to the IIP data. Because the topic of debt is in active discussion, the second part of the paper offers some observations about the meaning of the United States being an “international debtor," based on these same statistics. FOF and its Relation to IIP Data

Table 1 presents the FOF foreign sector balance sheet as it appears in the Flow of Funds Accounts: Financial Assets and Liabilities tables. The FOF levels presentation is related to the IIP statistics in mich the same way as the FOF flow data are related to the BOP. Although the FOF and [IP are related, some conceptual differences in presenting individual line items have resulted in differing net investment positions for the United States being shown or implied by the two sources. While there is no single line labelled U.S. “net investment position” in the FOF presentation, sich a position could be obtained by subtracting line 1 from line 16 of Table 1 and reversing the sign.4/ The actual IIP can be found on line 1 of Table 2, which is the Commerce presentation.5/ As can be seen, the net investment position of the United States already was negative in 1984 on the FOF basis.

U.S. Net Investment Position 6/ $ Billions 1980 1981 1982 1983 1984

FOF 13.8 49.3 54.6 8.6 -73.5 ITIP 106.0 140.7 147.0 106.2 28.2

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Although these two lines seem to indicate very different positions of U.S. foreign investment, a look at changes in the net investment position shows how the two sources nove in virtual lock-step with each other.7/ To be able to reconcile the FOF and IIP statistics we need to dissect the FOF foreign sector and to show the data sources and underlying arithmetic.

. Change in U.S. Net Investment Position "§ Billions

1981 = 1982 1983 1984

FOF 35.5 5.3 “46.0 82.1 IP 34.7. 6,3 -40.8 -78.0

An expanded version of the published FOF foreign sector table can be found at the end of this note along with a line-by-line listing of all the data sources——both published and unpublished--that are used in constructing the account. Most line items found in the published version of the foreign sector are outputs of intermediate calculations, the result of data inputs being combined. The expanded version of the account allows one to see how each Line in the published form of the accounts is calculated, and

“the source listing lets the truly inquisitive track down all the original inputs. In addition, FOF data codes are listed for each line item for readers who may be FOF data tape users.8/

Prior to 1981, the major difference between the FOF and IIP presentations was the way FOF incorporated banking and gold data in the accounts, the former coming, from banking rather than BOP sources. With the introduction of. International Banking Facilities (IBFs) in December, 1981,

a new wedge was put between the Commerce and FOF presentations. Adjustments made to FOF data to exclude asset and liability positions of IBFs have since

then contributed to sharply diverging measures of assets and liabilities

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~ 3b - TABLE 2*

: Table 2.——International Investment Position of the United States at Yearend, 1970-84 ‘[Millions of dollars)

1 | Net international investrrent ition of | 58,473 | 45,511} 37,036 11894 | 38,731 the United States (line :: less line 20). .

2 U.S. assets abroad.......... 0.0... 165,385 | 179,004 | 198.694 | 222,130 | 253,719

3 US. official reserve assets ' 14,487 | 12,167 | 13,151 | 14,378 | 15,883 |.

4 Good Bane ececsececcscstese cesees 11,072 | 10,206 | 10,487] 11,652) 11,652

5 Special drawing rigi | 851 1,100 1,958 2,166 2874

6 Reserve position in ‘the International 1,935 585 465 552 1,852

Monetary Fund '. 7 Foreign currencies Ba ccsesesseeneeseveeseree 629 276 241 8 5 8| US. Government smets, other than | 32,143] 34,161 | 36,116) 38,807 | 38,331 * official reserve sasets.

9 Us Sis loans and other long-term | 29,691 | 31,768; 34,118! 96,187} 36,268 10 25,582 | 28.418 | 30,617 | 33,030 11 - 6,182 6,185 5,699 5,570 3,238 12 US. foreign currency | holdings ‘and 2,452 393 1,998 2,620 2,063

US. short-term a wi | 13 U.S. private assets... 132,676 | 149,427 , 169,245 | 201,505 14 Direct investment j 82,760 | 89,878 | 101,313 | 110,978

15 securities 23,360 | 27,383 446 16 we 15,719 | 16,846) 17,420! 19,192 17 Corpora: 7,641 10,537 | 10,026 i 9,011 18 US. claims on uni | 9637! 11,427] 13.767 | 16,989

ers reported by US. nonbanking | . concerns * 19 US. claims reported by U.S. banks, | ‘13,837 ; 16,919] 20,739) 26,719 | 46,235 not included elsewhere ¢. | . t ii

20| Foreign assets in the United States............] 106,912 | 133.193 | 161.658 | 174,536 | 196,988 21 Foreign official assets in the United | 26,151 cous | 62,998 | 69,266 | 79,865 22 U.S. Government securities.... 44,402 | 52,906; 53,777: 58,072 23 US. Treasury sec arities 7 44,364 | 52,607 | 52,903 | 56,504 24 47 38 299 874 1,568 | 25 | Other U.S. Government liabilities * 1,763, 1,252, 1,435 2,388 2,726 26 | US. liabilities reported by US. 6,679 6,831; 8,469) 12,595 18,420

banks, not included eleewhere. ; |

27 Other foreign officin! semete 7 ..........c..cfeossscesceesefescsssseesennee 188 506 647 28 Other f foreign assets in the United | 80,761 81,008 | 96,660} 105,270 | 117,123 2 Direct investment in the United 13,270 | 13,914 | 14,868 | 20,556 | 25,144

tates

30 US. Treasury securities’ ...................--+ 1,194 1,194 1,159 958 1,655, 31 U.S. securities other than US.] 34,786 i 40.209 | 50,693 | 46,116 | 34,892 32 7,577 9,398 11,634 12,600 | 10,671 38 27,209} 90,811} 39,059} 33,516] 24,221 FY] ] 8881] 9.288| 10.714] 31,712| 13,586

ing concerns

85 US. liabilities reported 22,680! 16,454] 21,226! 25,928! 41,846

by US. i banks, not includid elsewhere *. Cea el

* Revised.

? Preliminary.

1. Total reserve assets include increases from changes in the par value of the dollar: on May 8, 1972, the increase totaled $1,016 million, consisting of $828 million gold stock, $155 million special drawing rights (SDR), and {33 million U.S. reserve position in the International Monetary Fund (IMF}, on October 18, 1973, the increase totaled $1.436 million, consisting of 31,165 million gold stock, $217 million SDR. and $54 million reserve position in the IMF. The gold stock is valued at $35 per fine troy ounce until May 8, 1972; thereafter, at $38 per fine troy ounce until October 18, 1973, pursuant to the Par Value Modification Act (P.L. 92-268), and, thereafter, at $42% per fine troy ounce pursuant to an amendment (in P.L. 93-110) to the Par Value Modification Act. Beginning in 1974, the value of the SDR, in which the US. holdings of SDR and the reserve position in the IMF are denominated, fluctuates based on the weighted average of exchange rates for the currencies «f principal IMF members. Foreign currency reserves are valued at exchange rates at time of purchase through 1973 and at current exchange rates thereafter.

2. Also includes paid-in capital subscription to international financial institutions and outstanding amounts of miscellaneous cliims that have been settled through international agreements to be payable to the U.S. Governmunt over periods in excess of 1 year. Excludes World War | debts that are not being serviced.

3. Includes indebtedness that the borrower may contractuaily, or at its option, repay with its currency, with a third country’s currency, or by delivery of materials or transfer of services.

~—

74.240 I 83.578 | 72,741 | 76,115 | 94.457 | 106.035 | 140,700 | 146.987 Cor 28,245 295,100 , 347,160 | 379,105 | 447,847 | 510,563 | 606,865 | 719,683 | 838.962 099.826 | 914.693 16,226 | 18,747] 19,314} 18,650] 18,956} 26,756 | 30,075} 33,957) 33,748 | 34,933 11,599} 11,598} 11.719] 11,671} 11,172] 11,160} 12,151] 11.148] 11.121] 11.096 2385} 2395| 2629) 1.568] 2724; 2610) 4.096| 5.250) 5.025! 5,641 2212| 4434! 4946) 1,047] 1,253/ 2852] 5054] 7,348 Wa | 11,541 80 $21 20} 4,374} 3,807} 10,134] 9,774] 10,212] 6,289: 6,656 41,804 | 45,994] 49,544 | 54,200} 58,423 | 63,544 | 68,447 | 74,329, 79,246; 84.635 39,809 | 44,124} 47,749 | 52,252} 56,477) 61,828 67.008 | 72,660 : 77,561 | 82,661 36,815 | 41,309 | 45,154} 49,817} 54,085 | 59,604| 64.722 | 70.675 | 75,691} 80.844 2,994, 2815; 2595| 2485| 2392/ 2224 1,985; 1,871! 1,814 1,995) 1,870} 1,795] 1,948; 1,946] 1.715| 1,445] 1,669 ee | 1,974 237,070 | 282,418 | 310,247 | 374,997 | 433,184 | 516,566 | 621,161 | 730,676 | 780,833 795,125 124,050 | 136,809 | 145,990 | 162,727 | 187,858 | 215,375 | 228.348 | 221,843 | 226.962 | 233.412 34,913 44,157 | 49.439 384 | 56,800 63,452 | 75,672! 84.270) 89.875 25.328 | 34.704! 39,329 | 42.148] 41.966 487 | 45.791 | 56.698] 57.719! 61.973 9,585 | 9.453! 10.110] 11.236! 14.834! 19.166! 17.661| 18,974! 26.551 | 27.902 18,340 | 20,317 | 2% 28,070 | 31,497 | 34,672 35.853 | 28,583 | 35,096 | 28°29 | 59,767 | 81,185 | 92,562 | 130,816 | 157,029 | 203,866 | 293,508 | 404.578 | 434,505 | 443,009 | 220,860 | 263.582 | 306,364 | 371,730 | 416,106 | 500.830 | 578,983 | 691.975 86,910 | 104,445 | 140,867 | 173,057 | 159,852 | 176,062 | 180,425 | 189,188 63,553 | 72,572 | 105,386 | 128,511 | 106,640 | 118,189 | 125,130 | 132,587 61,107 | 70, 101,092 | 123,991 101,748 111,336 | 117,004 | 124,929 | | 2446; 2017; 4294! 4520} 4.892] 6.853 | 81126, 7.658 | 4.215} 8860} 10260} 12.749; 12749 | 13367: 13.029! 13,718 | | 16,262} 17,231 | 18,004! 23.327: 30.540; 30,381 26,731 | 24,989 2,880} 5,782} 7,217] 8470} 9923} 14,125 15,529 | 17,894 133,950 | 159,137 165,497 | 198,673 | 256,254 | 324,768 | 398,558 | 502,787 i i ' 27,662 | 30,770 | 34,595| 42,471 | 54,462 | 83,046 | 108,714 | 124,677 | 137,061 | 159.571 4.245| 7,028) 7,562}; 8910! 14210] 16,113| 18524] 25,8021 33,922: 56.870 45,663 | 54.913; 51.235! 53,554] 58587! 74,114] 75.353 | 93.567 114.710 | 128.201 10,025! 11,964) 11,456] 11,457| 10,269/ 9,545 | 10,727; 16,8051 17,454/ 32.290 35,638 | 42949} 39,779] 42,097 | 48,318 569 | 64,628 | 76,762 | 97,256 | 95.911 13,905 | 12,961] 11,921] 16,019| 18,669| 30,426) 30,606 “| 28,790 | 30,4 | 42,475 | 53,465 | 60,184} 77,719 | 110,826 | 121,069 | 165,361 231,282 | 280,623 | 312.297 i}

4. Estimates are linked, for 1977 forward, to the U.S. Department of Commerce 1977 benchmark survey and, for 1966-76, to the Commerce 1966 benchmark survey.

5. Breaks in the series reflect: in 1971, 1972, and 1978, expanded reporting coverage; in 1982, an increase in reporters’ exemption levels.

6. Breaks in the series reflect: in 1971 and 1972, expanded reporting coverage: in 1978, expanded coverage of bank holding companies and of brokers’ and security dealers’ reporting of liabi)ities; in 1981, expanded coverage of brokers’ and security dealers’ reporting of claims; and in 1977 and 1982, an increase in reporters’ exemption Jevels.

7. Estimates include results of 1974 and 1978 portfolio benchmark surveys conducted by the U.S. Department of the Treasury. Beginning with the 1978 benchmark, marketable Treasury bonds are valued at market price; previously, they were valued at acquisition price.

8. Primarily includes U.S. Government liabilities associated with military sales contracts and other transactions arranged with or through foreign official agencies.

9. Estimates are linked, for 1980 forward, to the U.S. t of Commerce 1980 benchmark survey; for 1973-79, to the Commerce 1974 benchmark survey; and through 1972 to the Commerce 1959 benchmark survey.

Nors.—Revised area tables for 1970-84 are available u ments Division (BE-58), Bureau of Economic Analysis, U. ton, DC 20230.

request from the Balance of Pay- . Department of Commerce, Washing-

From the June 1985 Survey of Current Business.

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considered separately.9/ Additionally, FOF data are gathered from diverse sources (e.g., bank call reports and nongovernmental sources), which contributes to different statistics being presented for line items in the FOF and LIP tables that appear to be definitionally the same (e.g., line 20 Table 1, Corporate bonds and line 32 Table 2, Corporate and other bonds). But even given these departures from the IIP, the FOF treatment has built into it a check system that enforces some consistency with the IIP. The following discussions on banking data, gold, IBFs, and the scheme FOF uses to impose consistency with the IIP statistics should make the reconciliation of the two sources a bit more transparent. Banking data

Banking data are exclusively derived from the call reports, which give somewhat more detail on banks' international positions than can be found in the IIP statistics.10/ Using the bank call data, FOF departs from the clear asset/liability split found in the IIP by presenting as a “net” figure the net claims (line 5 of Table 1) derived from due-tos and due-froms of both domestically-chartered and foreign-related banks with their foreign affiliates and deposit positions with unrelated foreign banks. 11/ This is made clear in lines 10-17 of the expanded table. The negative balance in line 5 of Table 1 indicates that domestic claims on foreign branches and foreign banks have exceeded affiliates' claims on domestic offices. Gold

The treatment of gold as an international financial asset differs between the LIP and FOF Accounts, and each is to some extent arbitrary. Both IIP and FOF have traditionally shown official gold under "U.S. Assets Abroad”,

as if gold were a bona-fide claim on foreigners, which it is not. In addition

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FOF shows gold reserve holdings of foreigners as an asset, which the Commerce figures do not, because they are not actually a “foreign asset in the United States." The FOF treatment of foreign gold--while debatable--is at least symmetiic with the treatment of domestic gold, so that any (these days almost none) dealings in reserve gold offsets in foreign and domestic accounts, which would not occur in the Commerce version. This inclusion accounts for the major portion of the value difference in asset outstandings up through 1980, prior to the IBF startup.

In both cases gold illustrates the judgmental element in putting such accounts together. Gold reserves included in the IIP and FOF accounts are no more an “international” asset than U.S. government holdings of silver, titanium, paper weights or box cars, because they represent no claim on a specific foreign country. Gold is in because of its (past) monetary role.

It remains, somehow, “internationally acceptable” in such accounts. But perhaps on the hypothetical day when accounts are settled, gold may be out of fashion. If the United States is, then, an “international debtor”, perhaps it may be asked to settle up in soybeans.

IBFs

Since December 1981, domestic and foreign-related banks have been permitted to establish international banking facilities. Flow of Funds treats IBFs in its accounts as part of the rest-of-the-world, whereas IIP statistics treat IBFs as domestic. To maintain consistency throughout the FOF accounts, foreign claims on IBFs and IBF claims on foreigners must be omitted from both the asset and liability side of the FOF foreign sector balance sheet. For example, in 1983 total IBF liabilities to foreigners

were nearly $120 billion. This is netted out of line 38 of the expanded

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table (Foreign assets in the U.S., which comes from the IIP) and is thus carried through and reflected in line 1 being $120 billion lower than it would otherwise be if IBFs were treated similarly to the IIP method. This explains a large portion of the difference between line 1 of Table 1 and line 20 of Table 2. . Consistency with IIP

The general scheme in the FOF Accounts is to present the foreign sector in a framework consistent with sectorization elsewhere in the accounts, but, at the same time, remain oriented toward the Commerce Department IIP statistics. This is effected by using FOF data sources and presenting the data in a way that is consistent with FOF methods while, at the same time, using the “other” category (lines 15 and 33 of Table 1) as a residual to capture any IIP effects that might have been missed by using other than Commerce Department sources. Both other assets and other liabilities are residuals with the "starter" (lines 38 and 90 of the expanded table) being derived directly from the IIP (Table 2 lines 20 and 13 respectively). For

example, lines 38 and 90 are obtained as follows:

$ Billions $ Billions

1983 1983

Foreign assets in the U.S. U.S. private assets abroad (IIP line 20) 787.6 (IIP line 13) 780.8

- Total IBF liabilities abroad 119.7 - Corporate stocks

= Foreign assets in the U.S. (LIP line 17) 28.6 (FOF line 38) 667.9 ~ Total IBF assets 119.8

= U.S. private assets abroad (FOF line 90) 634.6

Although FOF does show foreign holdings of U.S. equities as a foreign asset, it excludes U.S. holdings of foreign equities (other than

direct investments) because they are not a foreign liability. Since IIP

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statistics show equities on both sides, FOF must subtract line 17 (IIP) to obtain line 90 (FOF), U.S. private assets abroad. In addition, bonds sold by Netherlands Antilles affiliates of U.S. corporations (line 29 FOF) are included as foreign bond holdings in the FOF presentation, whereas in the Commerce treatment the intercompany debt associated with such bonds is netted against the U.S. foreign direct investment position. U.S. direct investment positions abroad in the FOF treatment thus are somewhat higher than will be shown in the IIP statistics. Clearly some of the treatment of data has its arbitrary elements and is a matter of judgment. The following example summarizes the reconciliation between FOF foreign asset holdings (FOF

line 1) and IIP foreign assets in the U.S. (IIP line 20).

$ Billions 1983 Foreign assets in the U.S. (line 20 IIP) 787.6 ~ Total IBF liabilities abroad 119.7 - Interbank claims on fgn. (lines 12, 13, 15, 16 FOF expanded) 164.5 + Corporate bond adjustment (line 27 less 42 FOF expanded ) 10.6 + Golé. (line 2 FOF expanded) 59.8 = Total financial assets (line 1 FOF) 573.8

Movements in Investment Positions

As shown earlier, annual changes in the net international investment position on both the FOF and IIP basis closely parallel each other. Movements through time in an international investment position can be strongly influenced by valuations of the assets and liabilities included in the accounting. As shown in Table 1 of the June 1986 Survey report on the U.S. IIP, both price and exchange rate changes contributed importantly to the 1985 results. Commerce “revalues” U.S. private assets in the accounts for both factors; U.S. official assets are adjusted for exchange rate changes; ‘and all foreign

assets in the United States are revalued for price movements.

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The FOF treatment follows Commerce, and uses Commerce dat:a, both in revaluing equities and in not revaluing gold or direct investment. Unlike Commerce, however, FOF does not estimate market values of bonds, government securities or other assets. This treatment is in line with usage elsewhere in the FOF accounts, but since it differs somewhat from Commerce, it contributes to discrepancies between the two sets of numbers. This was the primary factor that contributed to the differences between the FOF and IIP changes in net U.S. investment positions presented earlier. |

The large net capital inflow associated with the $118 billion current account deficit in 1985 was the dominant factor in turning the United

States, statistically, into a “net debtor.” The associated recorded capital inflow to the United States was $95 billion. In addition, a negative net valuation adjustment of $17 billion accounted for the rest of the $112 billion swing to net debtor status. The $17 billion valuation adjustment comprised a $39 billion increase in foreign asset valuation, largely due to a rise in the price of U.S. securities held by foreigners, partly offset by a $22 billion increase in the value of U.S. assets abroad, which consisted of price and

exchange rate-related appreciation of foreign securities.

Composition of 1985 Change in U.S. Net Investment Position

$Billions Position Capital Price Exchange Total Position 1984 flows changes rate and 1985 other changes (a) (b) (c) (atbtc) 1. Net position or change 4 -95 -24 7 -112 -107 (line 2 less line 3) 2. U.S. assets abroad 898 32 12 1l 55 952 3. Foreign assets in the U.S. 894 127 36 3 166 1060

Source: SCB, June 1986, Table 1, p. 27.

United States as a Net Debtor

As indicated above, the emergence of the United States as a net "international debtor” was widely anticipated in 1985. Indeed, a special note by Jack Bame to the June 1985 SCB article on the investment position already noted that “sometime during the first half of 1985, the United States became a. net debtor for the first time since 1914." As this forecast turned into statistical fact, there has subsequently been some comment and publicity about this development. Judging from the press, it is not clear all readers made it through to the last line of the special note. There, referring to the large and positive cumulative statistical discrepancy from 1979 to 1984, Bame adis that “foreign assets in the United States [may] have been understated by that amount, and the United States actually may have shifted to net debtor position earlier than this year."

While this paper is directed mainly at showing two presentations of the U.S. international position, it may yet be appropriate to include some comments on this “international debtor” question. The problem of the United States as an international debtor has been treated with evident alarm in public discussions, complete with allusions to impoverished LDCs, worried foreign investors and future generations of Americans struggling to pay it all back. From the viewpoint of the professional economist the situation should not be evaluated in exaggerated and emotional terms. Becoming an international “debtor” in 1985 (or 1983 or 1984?) does not absolutely mean the sky is falling. The following comments highlight the purely statistical facets of these kinds of data, which most economists likely would agree are an

appropriate background to any policy discussion on the U.5. “debtor” position.

- 10 -

An important point is that “international debtor” often is used synonymously (even by Commerce) with “negative net international investment position." The terms are not synonyms. Among statisticians this usage may seem harmless, but when reiterated in the press the important distinction between international assets which are someone's debts and those which are not debts often is lost in the analysis.

It is also useful to note that the deterioration in the net U.S. international investment position is not due to a decline in U.S. claims abroad (line 2, LIP) as is sometimes thought by casual observers. U.S. claims on foreigners in fact have risen at a 14 percent annual rate throughout the 1980s. The deterioration in the net position has resulted from the acceleration of foreign assets in the U.S. (line 20, IIP). This has outpaced the growth of U.S. claims by about 11 percent annually over the period 1980-1985. Some observers have erroneously confused a declining net investment position with an absolute drop in U.S. foreign assets, which definitely has not occurred.

A perusal of the time series in Commerce's Table 2, for instance, shows statements of U.S. Assets Abroad and Foreign Assets in the United States, and a balance which is the IIP. This balance is the measure most often referred to as heading toward the “net debtor” reading. But it is clear that substantial parts of these accounts are not debt at all. On the U.S. side, gold surely is no-one's debt. IMF-related assets probably should not be considered debt and, of course, direct investment and corporate stock are not debts in the usual sense. 12/ Similar comments apply to Foreign Assets in the United States (noting again that gold does not appear). Thus,

“international debtor” is a phrase with a large semantic component. As shown

- ll -

below, excluding the non-debt components of international assets results in

the United States becoming a net debtor already in 1984.

U.S. Net Asset Position (excluding items listed above, $ Billions)

1981 1982 1983 1984 1985

U.S. Assets: 453.3 574.4 612.9 629.1 648.7

- Foreign Assets: 405.7 487.2 551.2 633.4 750.9 = net position 47.6 87.2 61.7 -4.3 -102.2

Thus, only portions of positions per se. The statement just provides a rough measure of and, some would argue, a measure

mobilized in a real panic. Some

the Commerce statement deal with debtor

as a whole, most economists would agree, the scale of U.S. international engagement of the amount of assets which could be

pundits cite figures like these to warn

that “a ‘lot of dollars can be sold at once."13/

In current circumstances, with a large current account deficit and

a falling dollar, it seems plausible that rises and falls in the U.S.

investment position have some predictable connection to the exchange market's

treatment: of the dollar.

two phenomena are well connected.

the past 15 years the dollar has

But historically it is not at all clear that these

As the table below illustrates, during

sometimes fallen over periods during which

the U.S. international position was “improving,” and, conversely, several of

the dollar's strongest years were accompanied by sharp “deteriorations” in

this position.

While this observation does not preclude episodes of exchange-

market pressure directly associated with the evolution of the U.S. net

external asset position, the latter certainly cannot be viewed as the only

factor involved.

-~ 12 -

Change in U.S. Net Investment Position vs. Change in the Dollarl4/

Investment Position Dollar ($ billions) (Percent )

1970-1974 avg. -8.5 -4,.1 1975-1979 avg. 7.1 2.5 1980 11.6 5.4 1981 34.7 15.6 1982 -4.5 13.3 1983 -47.7 11.4 1984 -84,.1 12.3 1985 -111.8 -15.7 Valuation

Expressions of concern about either ongoing (flow) balance of payments developments or the associated movements in the U.S. investment position sometimes rest implicitly on the premise that some day of reckoning will arrive, on which all U.S. and foreign players will cash in their chips and settle accounts all around. This is not a likely occurrence. At all events, as noted above, the value of each side's position is a highly uncertain and variable thing, subject to particular accounting conventions. Some items are revalued periodically, but other important ones are not:. U.S. gold, for instance, has long been carried at a price which currently is about 1/8 of the market value. At the end of 1985 the published U.S. direct investment position abroad was $233 billion and the foreign position here was $183 billion. These’ figures are at book values; what would they be at market values? Surely both would be much higher. All of this touches only on the items conventionally included on the IIP statement. One could easily add, e.g., the U.S. silver stock and many other salable assets as well. The point here is simply that nothing in the IIP is very helpful or relevant in forming judgments about possible exchange-market crises or the resources at hand to

deal with them.

-13-

It may also be noted that the IIP and FOF presentations are both global statements of the U.S. position relative to the rest-of-world. Many observers may be unaware that there are--and have long been--significant imbalances in the U.S. net position against individual countries and regions. For some period of time the United States already has been a net debtor visa-vis other developed countries while maintaining a net asset position with Canada and Latin America, with no evident expressions of alarm. There are also imbalances in the “liquidity” aspects of the U.S. positions; typically it has been a net creditor on long-term investments and a net debtor on short-term positions.

Movement of the LIP toward net negative balances also arouses fears, in part, because continued U.S. current account deficits are considered to be unsustainable. That may be true but so are the corresponding rest-of-world surpluses (many economic developments are unsustainable but do not arouse undue alarm).15/ Concern has also been expressed that such deficits are the result of a persistent American tendency toward saving too little relative to investment, which pushes downward on the current transactions balance and "sucks in" foreign capital. The common view of the balance of payments is still that the capital account “accommodates” movements in the current account, and that the plunge in the IIP is a worrisome result of a deteriorating U.S. current account. But there is an alternative view which should at least be mentioned; the recent fall in the IIP may, to some extent, have been an expression of world confidence in the

U.S. economy, manifested in large capital inflows (i.e., purchases of dollars)

- 14 -

which dragged down the current account position.16/ The simple statistics, unfortunately, give little clue whether the decline in the IIP is a good or bad thing and, in itself, the IIP is no barometer of confidence in the dollar or the U.S. economy.

Balance of payments analysis rests largely on one simple equation, which says that the capital flow (measured and “unmeasured” flows together) is identically the same magnitude and opposite in sign to the current account flow. Such an identity gives no insight into the causality relations between current and capital accounts. Whatever factors, including dollar appreciation, lie behind the “deterioration” of the U.S. current account since 1982, they are the same which account for most of the measured “worsening"™ of the IIP. Whatever corrective (e.g., the dollar depreciation of 1985/86) the market may apply, if either or both the current and investment accounts are perceived to be out of line with collective desires, it will likewise affect both. In fact, a sharp dollar decline, perhaps suggesting a desire of both U.S. and foreign investors to adjust portfolios, that may be instrumental in changing both capital and current transactions, can potentially have a large valuation impact on U.S. foreign assets even before these transactions begin to adjust.

As Commerce itself has noted, even if the United States has become an international “debtor”, such a position is not comparable to those of LDCs who have contracted international obligations in non-domestic currencies.17/ The situation faced by such countries can, if severe, result in a foreign exchange crisis. The situation faced by the United States over the next few years--during which time the IIP probably will reach very substantial negative

figures--is much more a diversion of (net) income flows to foreign asset owners

-15-

and away from residents.18/ Such a diversion would also reduce the funds to pay for net imports of goods and services (other than net investment income ) even if’ net capital inflows remain as large as they have been recently. Even under such relatively favorable conditions, domestic spending would have to decline relative to domestic income, and domestic investment would have to decline relative to domestic saving. Whether the outcome, on balance, is favorable or not depends on many things. Certainly a negative turn in the IIP is not incontrovertibly a bad thing in all circumstances.

The above comments are intended to touch only briefly on the analytic issues raised by recent balance of payments developments which account: for most of the movement in the IIP in either the Commerce or FOF present:ations. No effort has been made to pursue any of these issues in depth, other than to mention some of the dangers attaching to incautious use of an important set of international statistics. Potential problems inferred from st:atistics are sometimes much in the mind of the beholder, and while sometimes they arise in the real world, sometimes also they do not. Whether the emerging “role” of the United States as an international debtor raises any genuine issues of concern depends on careful understandings of both the available data and the national income and balance of payments accounting which define possible real-world responses. We have not taken a position in this paper that no problems will accompany the drift of the United States into a net debtor position, but it seems to us that popular concern needs to be dispassionately analyzed.

What is not considered here is the use of the funds that have been borrowed abroad. In principle, if funds are borrowed to finance investments

that yield more than the costs of the borrowed funds, the net income of the

- 146 -

the borrower (i.e., the national income of the borrowing country) is raised, and borrowing is good and sustainable. Although in such circumstances the net international investment position of the borrowing country may well become negative, the total net wealth of the country nonetheless becomes larger. It is the latter measure which gives a more valid perspective than the international investment position, which does not include all assets, from which to form judgments about the desirability of particular external

balances.

-17- FOOTNOTES

*Economist and Chief, respectively, Flow of Funds Section, Division of Research and Statistics, Board of Governors of the Federal Reserve System. All material in this paper represents the personal views of the authors and should not be construed as those of the Federal Reserve System. The

authors wish to express their appreciation to Walther Lederer for his helpful comments on this manuscript.

1. As can be seen from June issues of the SCB, major movements in the IIP are determined by balance of payments developments. Price and exchange-rate movements are factored in, as are discontinuities where they can be identified. Periodic benchmark surveys--most of them rather old now--have provided additional information.

2. John F. Wilson, “The Foreign Sector in the U.S. Flow of Funds Accounts," International Finance Discussion Papers, Number 239, (April 1984).

3. Prior to October 1985 this publication was entitled Assets and Liabilities Outstanding.

4. ‘The FOF Foreign Sector balance sheet is presented from the standpoint of the foreign investor. Note that foreign gold is included as if it were a claim on U.S. residents.

5. Found in the June Survey of Current Business.

6. Data used in the text to reconcile the FOF presentation of the foreign sector with the IIP are based on data found in the June 1985 Survey of Current Business. The 1982-84 data given in the June 1986 SCB are revised downwards from those in this table. Flow of funds data had not yet been updated to incorporate the 1985 U.S. international investment position statistics when this paper was written.

J. The level differences are mainly attributable to the inclusion of foreign gold holdings in the foreign assets in the FOF presentation. Movements are mostly unaffected because changes in physical gold are small and gold holdings are not revalued.

8. Forms of calculation in the Flow of Funds Accounts change periodically; the presentation given here displays the calculation used through 1984. Cert:ain minor changes (e.g., in interbank claims) are being introduced for 1985 onwards. In addition, foreign gold holdings likely will be removed from the foreign international asset total.

9. Since IBFs are required to have almost all their assets and liabilities with foreigners, this factor has no major influence on the net investment position.

- 18 -

10. IIP banking data are derived from the Treasury International Capital Reports (TICs), where the meaning of “banks” includes, inter alia, bank holding companies, brokers and dealers, and thrift institutions.

ll. “Foreign-related” banks consist of U.S. branches and agencies of: foreign banks, Edge Act corporations and New York Investment Companies. Foreign deposits (of both banks and nonbanks) with U.S. banks are shown separately in lines 3 and 4 of Table 1.

12. In balance of payments statistics loans to affiliates are treated as direct investment, so direct investment includes a debt component, but this is often substitutable for--or can be converted to-~equity in these affiliates.

13. This kind of scenario, hinging on a view that everyone would try to sell (or buy) dollars in unison, is implausible. At all events, the IIP statement is not necessarily a good measure even of potential pressuie that can be applied (for or against) a currency, because it does not encompass futures and forward markets or potential decisions by holders of domestic assets to switch to foreign assets.

14. Dollar exchange rate changes are calculated from the Federal Reserve's trade-weighted index, which is based on exchange rates of a basket o/ 10 currencies belonging to the U.S.'s major trading partners. Percent changes are.calculated on a December-average over December-average basis.

15. Surpluses of individual countries, which reflect an excess of savings over domestic investment, may be more sustainable insofar as they do not have to be invested in the United States.

16. The near-impossibility of identifying either the current or capital account balance as “autonomous” or “accommodating” is a major theme in Ralph C. Bryant, “Dollar Balances and the U.S. Balance of Payments: A Conceptual Review,” doctoral dissertation, Yale University, 1966.

17. For an explanation of the U.S. as a net debtor nation during its developing years see, “The United States as a Debtor in the 19th Century,” by Robert Solomon, Brookings Discussion Papers in International Economics #28 (May 1985).

18. The fact that any perceived U.S. international debt “problems” will

not be intrinsically a foreign exchange problem does not mean that exchangemarkets would be unaffected by worries about the U.S. current account: or investment position. Ex post, current account adjustments (and their mirror image, capital account adjustments) are widely believed to be sticky and slow. No such constraint binds the ex ante desires of portfolio holders and market participants. Disparities between desires and feasible short--term adjustments are likely to be reflected by changes in the exchange rate, which can be swift and violent on occasion.

- 19 - References

Frankel, Jeffrey, “International Capital Mobility and Crowding Out in the U.S. Economy: Imperfect Integration of Financial Markets or of Goods Markets?" NBER Working Paper #1773 (December 1985).

Friedman, Benjamin, “Implications of the U.S. Net Capital Inflow,” NBER Working Paper #1804 (January 1986).

O'Leary, James, “The Flood of Foreign Investments in U.S. Credit Markets--Implications for Federal Reserve Policy and Interest Rates,” U.S. Trust, New York, New York (January 1986).

Kimelman, Nancy, James McKeon and Nicholas Sargen, “U.S. Flow of Funds: The International Dimension" Salomon Brothers Inc., New York, New York (June 1985).

Solomon, Robert, "The U.S. as a Debtor in the 19th Century,” Brookings Discussion Papers in International Economics #28 (May 1985).

_ ,» "Effects of the Strong Dollar,” Brookings Discussion Papers in International Economics #35 (September 1985).

Wallich, Henry, “Capital Movements-The Tail That Wags the Dog," The

International Monetary System: Proceedings of a Conference Sponsored by the Fecleral Reserve Bank of Boston (May 1984).

Wilson, John, "The Foreign Sector in the U.S. Flow of Funds Accounts," FRB International Finance Discussion Paper #239 (April 1984).

- 20 -

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16

- 233 - Appendix

Description and Source Sum of lines 2, 7, 9, 10, 18, 19, 31, 32, 35, 36, and 37.

Sum of lines 3 and 5, less 4 and 6.

FRB: Table 4, Gold Reserves of Central Banks and Governments— estimated total world gold; not shown after 1976, carried forward at March 1977 level.

FRB: Table 3.12, U.S. Reserve Assets, line 2: Gold stock, including exchange stabilization fund.

Original level from IMF, levels increased by periodic allocations.

FRB: Table 3.12, U.S. Reserve Assets, line 3: Special drawing rights.

FRB: Table 3.17, Liabilities to Foreigners Reported by Banks in the United States, line 3: Demand deposits.

Same as line 7 based upon TIC data.

FRB: Table 3.17, Liabilities to Foreigners Reported by Banks in the United States, line 4: Time deposits, plus line 49: Negotiable time certificates, less Time deposits at IBFs: Unpublished TIC worksheet data.

Sum of lines 11 less 12 and 13, plus 14, less 15 and 16, plus 17.

Domestic Bank Call Reports: Net due to foreign branches and IBFs.

Domestic Bank Call Reports: Due from foreign branches and IBFs.

Domestic Bank Call Reports: Cash due from foreign banks.

Foreign-Related Bank Call Reports: Net due affiliates less IBFs due to foreign affiliates, net.

Foreign-Related Bank Call Reports: Gross funds due from foreign affiliates less IBFs net due from foreign affiliates.

Foreign-Related Bank Call Reports: Balance due from foreign banks and foreign central banks less IBF balances abroad.

Line

17

18 19 20 21

22

23

24

25

26 27

28

29

30 31 32

33

34

35

- 24-—

Description and Sources

Foreign Branch Call Report: Foreign branch loans to U.S. nonbanks. (These data occasionally have been adjusted for special factors.) |

SCB: IIP Table 2, line 33: Corporate stocks.

Sum of lines 20, 27, and 30.

Sum of lines 21 and 24.

Sum of lines 22 less 23.

FRB: Table 3.17, Liabilities to Foreigners Reported by Banks

in the United States, line 8: Treasury bills and certificates (TIC data).

Monthly Statement of the Public Debt Outstanding: Table III, Detail of public debt outstanding, nonmarketable foreign series,

plus Treasury deposit funds bills and certificates of indebted- Sum of lines 25 less 26.

Treasury Bulletin: Table OFS-2, Estimated ownership of public debt securities by private investors-foreign and international (TIC data).

Same as line 21.

Sum of lines 28 and 29.

SCB: BOP table 6: Securities Transactions, line B10, corporate and other bonds, and memo line 3, U.S. corporate and

other bonds. Level is incremented by flow.

SCB: BOP text table D: Netherlands Antilles Transacti.ons, line 1, capital. Level is incremented by flow.

FOF estimate.

‘No longer shown separate from trade credit: Assumed = 0.

Sum of lines 33 and 34.

FRB: Table 3.22, Liabilities to Unaffiliated Foreigners, line 7: Commercial liabilities.

SCB: BOP Table 4, line C.1: Liabilities other than securities. :

Sum of lines 36 and 37.

Line

36

.37

38

39 40 41

42

43 44 45 46 47 48 49 50 51 52 53 54

55

56

57

SCB:

~ 25 -

Description and Sources

IIP Table 2, line 29: Direct investment in the United States.

Sum of lines 38 less lines 39 through 51.

SCB:

IIP Table 2, line 20: Foreign assets in the United States (less total IBF liabilities abroad).

Same as line 8.

Same Same

SCB: plus

Same

Same

. Same

Same

Same

Same

Same

Same

Same

as line 9.

as line 20.

IIP Table 2, line 27: Other foreign official assets,

line 32:

as as as as as as as as

as

line line line line line line line line

line

Sum of lines

Sum of lines

Corporate and other bonds. 34. 33. 18. 31. 30. 36. ll. 14. 17. 53, 56, 59, 81, 82, and 83.

54 and 55.

FRB: Table 3.12, U.S. Reserve Assets, line 4: Reserve position in IMF.

FRB: Table 3.12, U.S. Reserve Assets, line 5: Foreign currencies.

Sum of lines 57 and 58.

FRB:

Table 3.23, Claims on Unaffiliated Foreigners, line 6:

’ Deposits, payable in dollars.

Line 58 59

60

61 62

63

64

65 66

67

68

69 70

71

72

73

74

75

76

- 26 -

Description and Sources

Investment Company Institute: Money Market Funds: Eurodollar CDs. Sum of lines 60, 61, 73, and 77.

SCB: BOP Table 6, Foreign Securities: Bonds, Treasury basis Line Al2: Level is incremented by the flow (TIC data).

Sum of lines 62, 65, and 69. Sum of lines 63 and 64.

Domestic Bank Call Reports: Loans to foreign official institutions.

Foreign-Related Bank Call Reports: Loans to foreign official (current report form excludes IBF loans).

Sum of lines 66, 67, and 68.

Domestic Bank Call Reports: Loans to foreign banks.

Foreign-Related Bank Call Reports: Loans to foreign banks (current report form excludes IBF loans).

FRB: Table 1.18, Federal Reserve Banks, Line 5: Loans to other.

Sum of lines 70, and 71, less 72. Domestic Bank Call Reports: Cé&I loans to foreigners.

Foreign-Related Bank Call Reports: C&I loans to foreigners (current report form excludes IBF loans).

Foreign Acceptances Held by Domestic Banks: Calculated as (total foreign accept liabilities (263169603) /total accept. liabilities (893169600)) x total domestic bank holdings of accept (763069603 - 753096603).

Sum of lines 74, 75, and 76.

FRBNY: Bankers' Acceptances release: Sum of exports and goods stored in. or shipped between foreign countries.

FRBNY: Commercial Paper release: Commercial paper issued by financial companies, dealer-placed, foreign.

FRBNY: Commercial Paper release: Commercial paper issued by nonfinancial companies, foreign.

. Line 77 78

79

80

82.

83- 84 85 86

87

33

89 90

9]

92

is 94 95 96

97

os

~27-

' Degcription and Sources Sum of lines 78, less 79, and 80.

SCB: IIP Table 2, line 8: U.S. government assets, other

than official reserve assets.

SCB: IIP Table 2, line 12: U.S.

_ foreign currency holdings + short term claims.

Treasury Bulletin: Footnote to non-defense table on agency loans etc., capital subscriptions to IBRD, IFC, IADB, IDA, African Development Bank, and Asian Development Bank.

No longer shown separate from trade debt, assumed = 0.

FRB: Table 3.23, Claims on Unaffiliated Foreigners, line 11: Commercial claims.

Sum of lines 84, 85, 86, and 89.

Same as line 80.

Same as line 79.

Sum of lines 87 less 88.

SCB: IIP Table 2, line 14: Direct investment abroad. Same. as line 29.

Sum of lines 90, less 91 through 04.

_SCB: IIP Table 2, line 13: U.S. private assets, less line 17:

Corporate stock, less IBF liabilities abroad. Same as line 87. Same as line 61.

Same as line 82.

' §CB: IIP Table 2, line 16: Bonds.

Same as line 58. Same as line 8l.

Same as line 57.

Same as line 74.

- 28 -

Line Description and Sources 99 Same as line 75. 00 Same as line 76. ° 01 Same as line 13. 02 Same as line 16. 03 Same as line 12. 04 Same as line 15.

Appendix Abbreviations

FRB SCB

Federal Reserve Bulletin

Survey of Current Business, either International Investment Position (IIP) tables published annually, in June, or quarterly Balance of Payments (BOP) material.

FRBNY = Federal Reserve Bank of New York releases

TIC = Treasury International Capital reports

.IFDP

NUMBER

295

294 293

292

291

290

289 288 287

286

285 284

283

‘the Yen/Dollar Exchange Rate:

29

International Finance Discussion Papers

TITLES 1986

The United States International Asset and Liability Position: A Comparison of

' Flow of Funds and Commerce Department

Presentation

_The Structure and Properties of the FRB “Multicountry Model

Short-term and Long-term Expectations of Evidence from Survey Data

Anticipated Fiscal Contraction: The

Economic Consequences of the Announcement of Gramm-Rudman-Hollings ~

Deposit Risk Pooling, Irreversible Investment, and Financial Intermediation

The Yen-Dollar Relationship: A Recent Historical Perspective |

Should Fixed Coefficients be Reestimated

- Every Period for Extrapolation?

An Empirical Analysis of Policy Coordination in the U. on Japan and Europe

-Comovements in Aggregate and Relative

Prices: Some Evidence on 1 Neutrality

Labor Market Rigidities and ‘Unemployment: The Case of Severance Costs

A Framework for Analyzing the Process

of Financial Innovation

AUTHOR(s)

Guido E. van der Ven John E. Wilson

Hali J. Edison Jaime R. Marquez Ralph W. Tryon Jeffrey A. Frankel Kenneth A. Froot

Robert A. Johnson

Robert A. Johnson Manuel H. Johnson Bonnie E. Loopesko

P.A.V.B. Swamy Garry J. Schinasi

Hali J. Edison Ralph Tryon B. Dianne Pauls

Michael K. Gavin

Allen B. Frankel Catherine L. Mann

Please address requests for copies to International Finance Discussion Papers, Division of International Finance, Stop 24, Board of Governors of the Federal Reserve System, Washington, D.C. 20551.