The decline in the US international investment position

Net international investment position (NIIP) captures the difference between two large numbers: the value of US-owned assets abroad (foreign assets) and the value of foreign-owned assets in the US (foreign liabilities). The NIPP determines whether a country is a net creditor (positive position) or a net debtor (negative position) and is an important indicator of a country's financial condition.

The FRED graph above shows that the US NIIP as a percentage of US gross domestic product has been negative and declined sharply since the 2008 financial crisis. From 2007 to 2021, the NIIP fell dramatically, by approximately 67 percentage points of GDP, from -9% to -76% of GDP. There was a brief increase in 2022, when the NIIP rose to -62% of GDP. But this recovery was short-lived. By the end of the first quarter of 2024, the US NIIP had fallen again, back to -75% of GDP. This overall trend represents a significant and persistent weakening of the United States' financial position relative to the rest of the world over nearly two decades.

What's driving this decreasing trend in the US NIIP? Examining the evolution of the two major components of the NIIP separately-foreign assets and foreign liabilities-will allow us to determine whether the decreasing NIIP is primarily due to changes in US foreign assets, foreign liabilities, or a combination of both.

The second FRED graph, above, breaks down US assets (green line) and liabilities (red line) as percentages of US GDP. Assets and liabilities generally move in tandem, but the percentage of US-owned assets abroad is consistently lower than foreign-owned US assets.

At the start of the financial crisis, this gap in investment began to widen and assets fell by a larger percentage than liabilities: 30 versus 10 percentage points, respectively. Then in 2012, assets and liabilities moved apart and the gap widened. From 2012 to 2020, assets steadily fell within 120% to 140% of GDP while liabilities hovered between 160% and 180% of GDP. At the onset of the pandemic, around the second quarter of 2020, both assets and liabilities jumped, but liabilities increased by a slightly larger percentage.

Data show that the growing gap between US-owned assets abroad and foreign-owned US assets explains the increasing decline in the US net international investment position.

But this gap is driven by more than just new investments and divestments. A crucial factor is the impact of valuation changes on existing asset holdings. These valuation effects can arise from fluctuations in asset prices, such as stock market movements, or changes in exchange rates. Such changes can significantly alter the value of cross-border holdings without any actual transactions taking place. A more comprehensive understanding of this NIIP deterioration needs a detailed study of both the composition and valuation dynamics of these international assets and liabilities.

How these graphs were created: Search FRED for "International Investment Position" and select "U.S. Net International Investment Position." Click the "Edit Graph" panel in the upper right corner to open the "Edit Line" box. Scroll down to "Customize data." In the text box, search for "gdp" and select "Gross Domestic Product." Click "Add" next to the text box. Below this section, in the "Formula" space, enter (a/1000)/b and click "Apply." Repeat this process for the second graph with "U.S. Liabilities." Next click the gray "ADD LINE" box at the top. In that search box, search for "U.S. Assets." Scroll down to "Customize data": Search for "gdp" and select "Gross Domestic Product." Click "Add" next to the text box. Below this section, in the "Formula" space, enter (a/1000)/b and click "Apply."

Suggested by Ana Maria Santacreu and Ashley Stewart.