06 Apr 2006

Foreign Investment in the US (I): Disappearing in a black hole?

Daniel Gros

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The US international investment position today should in principle be equal to the sum of past current account balances (mostly deficits). However, this is by far not the case even taking into account the balancing item ‘errors and omissions’. Between 1982 and 2004, the US has accumulated a grand total of around $4.5 trillion (thousand billion). (The sum of current account deficits has been about $1 trillion smaller than the amount of net sales of US assets to the rest of the world because of the anomaly in reinvested earning.) Despite this accumulation of deficits the US net international debtor position (IIP) has deteriorated ‘only’ by $2.7 billion (and is now estimated – at the end of 2004, end 2005 figures are not yet available for the US IIP – at ‘only’ around $2.5 trillion). This implies a total of ‘unearned’ gains to the US of around $1.8 trillion during 22 years. The quite detailed data available for a somewhat shorter period (1989-2004) show that only a very small part of this sum, around 10-20%, can be explained by exchange rate and stock market changes.
One must thus conclude that the US has acted like a black hole for capital from the rest of the world: one can observe a large amount of investment flowing into the US, but after some time it disappears from the statistics (and foreign investment in the US that takes the form of FDI earns almost no return). The discrepancy arises for a simple reason: the flow data are based on actual flows of payments recorded in the balance of payments. By contrast, the stock data (on the US international investment position) are based on US surveys, which tend to miss out on US assets held by foreigners. This implies that it is likely that the true US net debtor position is significantly larger than officially reported.