I was doing a talk earlier today about the global economy in the City and I was going through a list of things that kept me worried such as China's banking system and non performing loans, Brexit, excessive Quantitative Easing, $11 trillion of distorted negative yielding sovereign debt, Japans national debt at 250% of GDP, overpriced property in Chinese Cities and the UK and Canada, €350 billion of Non performing loans in the Italian banking system, overpriced US equities and so on. But there is another thing that also keeps me worried and is not often talked about. It is the ever growing indebtedness of the United States as reflected in it's Net International Investment Position (NIIP). The NIIP measures the difference between what the rest of the world owes the United States (its assets) and what the US owes the rest of the world (its liabilities) -see figures 1 and 2 below.
At any point in time, the United States NIIP figure is affected by three factors: (1) the size of the US current account – a current account deficit means the NIIP will worsen by the amount of the current account deficit since it needs to borrow the equivalent sum from foreign residents (2) changes in the local currency values of US assets and liabilities, for example the value of foreign stocks and bonds held by US residents (US assets) and the value of US stocks and bonds held by foreign residents (US liabilities) – if US holdings of foreign stocks and bonds rise in price more than foreign holdings of US stocks and bonds this helps to improve the United States NIIP; and (3) changes in the dollar exchange rate, for example a depreciation of the dollar against the euro will raise the dollar value of US residents’ holdings of euro-denominated assets and thereby help improve the United States NIIP but a stengthening of the dollar worsens the US NIIP.
At any point in time, the United States NIIP figure is affected by three factors: (1) the size of the US current account – a current account deficit means the NIIP will worsen by the amount of the current account deficit since it needs to borrow the equivalent sum from foreign residents (2) changes in the local currency values of US assets and liabilities, for example the value of foreign stocks and bonds held by US residents (US assets) and the value of US stocks and bonds held by foreign residents (US liabilities) – if US holdings of foreign stocks and bonds rise in price more than foreign holdings of US stocks and bonds this helps to improve the United States NIIP; and (3) changes in the dollar exchange rate, for example a depreciation of the dollar against the euro will raise the dollar value of US residents’ holdings of euro-denominated assets and thereby help improve the United States NIIP but a stengthening of the dollar worsens the US NIIP.
Figure 1 above shows the difference between US external assets and US external liabilities while Figure 2 shows the gap between the two, that is, the NIIP. The United States has gone from being a net creditor country of $360 billion in 1980 to a net debtor nation of $8,043 billion in 2016. A major cause of this has been the fact the US has been running current account deficits ever since 1982 and these deficits have to be financed by either selling assets to foreign residents or increasing liabilities to foreign residents. Of course, the NIIP is also affected by changes in the market values of the assets and liabilities. So even though the U.S. had large current account deficits in 2009 and 2010, its NIIP actually improved from minus $4,000 billion in 2008 to minus $2,470 billion as the market value of its liabilities measured in dollars rose by less than the market value of its assets measured in US dollars. But since then, things have deteriorated such that its NIIP figure is some 45% of US GDP. The rebound in the US economy is to a large extent built upon an ever increasing external debt. This is something that should worry us, debt built recoveries expose an economy to great risk should sentiment against a country change - we have seen this in the cases of Greece and Ireland. Of course, a change in sentiment towards the United States would be a far more worrying thing for the global economy as Ireland and Greece are minnows compared to the US economy. Expect to hear a lot more about the Net International Investment Position of the US during the Donald Trump presidency.
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