The End of Privilege: A Reexamination of the Net Foreign Assets Position of the United States
A country’s net foreign asset position measures the value of all assets residing abroad minus the value of assets held by foreigners in the country. This is an important statistic, because all else being equal, a higher net foreign asset position means a country can expect higher future net income from abroad and thus plan to run larger trade deficits in the future. A common way to decompose changes in the net foreign asset position is to recognize that this position may improve because a country acquires, net, additional foreign assets—that is, it runs a current account surplus—or because the market value of existing assets owned abroad exceeds the value of foreign-owned assets at home. increases compared to
The United States has long had a negative net foreign asset position. But until 2007 it remained relatively small, never exceeding 20% of US GDP. Indeed, the position was surprisingly small given the US’s history of large and persistent current account deficits. In influential papers, Gourinchas and Ray (2007, 2014) emphasize the importance of valuation effects in shaping the dynamics of US net foreign asset positions. At the time they wrote, these revaluations appeared to be moving consistently in favor of the United States, especially in the mid-2000s. The net effect is that the United States appears to enjoy the advantage of being able to borrow continuously without borrowing too much. Gourinchas and Ray and others have argued that this privilege reflects an asymmetry in cross-country portfolios, with Americans owning large amounts of direct investment abroad and portfolio equity assets—the value of which tends to increase over time—while U.S. liabilities consist of disproportionately low-return U.S. government bonds. .
Our paper (Atkeson et al. 2022) updates the history of US net foreign asset positions using data compiled by the US Bureau of Economic Analysis and the US Treasury. Financial Accounts of the United States. We see that a lot has changed in the last 15 years. First and most notably, the US net foreign asset position has deteriorated rapidly, from negative 5% of US GDP in 2007, to negative 65% of US GDP by the third quarter of 2021. Such a large negative net position is unprecedented What has driven this decline? What are the welfare implications for Americans?
We begin by showing that the decline in the US net foreign asset position over this period is driven mostly by valuation effects, with the current account deficit playing a minor role. Indeed, the implications of this assessment are so large that by the end of 2021 the US net position is more negative than all US current account deficits combined since 1992 (see Figure 1). This is why we titled our paper “The End of Rights”.
Figure 1 US net foreign asset position (NFA), cumulative current account (CA) deficit and cumulative valuation effect (VA)
Next, we dig into the sources of these valuation effects. We find that valuation effects have driven down the US net foreign asset position as the value of foreign-owned assets in the US has risen sharply. This may seem surprising to readers under the impression that the United States acts like a hedge fund, borrowing from abroad in the form of stable-value Treasury bonds and investing abroad in volatile equity-type investments. But U.S. financial accounts show that that stylized view of the U.S. international investment position is becoming increasingly outdated. In particular, in the post-Great Recession period, foreign-owned equity holdings in the US are larger and equal to US-owned equity holdings abroad (Figure 2). The US Bureau of Economic Analysis estimates that the value of these foreign-owned equity holdings has increased over the past 15 years, with a spectacular bull run for the US stock market during this period. At the same time, the value of US-owned assets abroad rose much more slowly, as foreign equity markets vastly underperformed those in the US (Figure 3). Thus, the market value of US foreign liabilities increased much faster than the market value of US foreign assets, depressing the US net foreign asset position.
Figure 2 US foreign assets and foreign liabilities as a share of GDP
Figure 3 Stock price indices for the United States and for the world excluding the United States, in dollars and local currencies
Up to this point, all we’ve done is simple accounting. Our next objective is to address the welfare implications of the decline in the US net foreign asset position. Doing so requires a model in which we can simulate shocks that increase the value of US assets. Farhi and Gourio (2019) developed a tractable macro asset pricing model that can be used as an accounting framework to trace the contribution of various potential drivers of asset revaluation. They explore the relative roles in long-term macro and asset valuation trends of (1) changes in firm market power, (2) changes in the importance of intangible capital, and (3) changes in risk premia. Greenwald et al. (2022) conducted a similar exercise. They conclude that the most important driver of rising US equity prices between 1989 and 2017 was a series of factor share shocks that redistributed output towards shareholders at the expense of workers.
In our paper, we extend a model similar to that of Farhi and Gourio (2019) and Greenwald et al. (2022) in an international setting, so that we can explore differential cross-country asset valuation dynamics and their implications for current account and net foreign asset positions. In our model, firms in each country produce a different variety. Each variety can be produced by a more productive ‘leader’ firm or by less productive potential competitors. In equilibrium, leader firms engage in price-limiting, set as large a markup as possible, and still preserve their production monopoly. We use the model to explore two different potential drivers of a US-specific increase in asset values.
The first hypothesis we entertain is that the productivity gap between leader and follower firms has increased in the United States—but not in the rest of the world. This leads to an increase in US markups, US monopoly profits and prices for US firms. From the perspective of firm owners, a jump in firm value appears as an unexpected excess return on equity. And if these owners are foreign, the shock implies a permanent increase in the share of US income accruing to foreigners. Thus, in this model, the decline in the US net foreign asset position reflects a redistribution of income away from Americans and toward foreigners. We argue that this model of firm values is consistent with two key empirical findings. First, it is consistent with the fact that corporate payouts measured relative to GDP have grown significantly in the United States in recent decades, while payouts in other countries have not (see Figure 4). Second, the model is consistent with the fact that US current account deficits have generally been modest in the post-Great Recession period.
Figure 4 Corporate Payouts in the US and EU
We also consider an alternative hypothesis for rising US asset prices, which is that production has become more intensive in the form of capital that is poorly measured in the national accounts. Under this hypothesis, the value of the US stock market rises because US (but not foreign) firms invest heavily in unmeasured intangible forms of capital. Along a balanced growth path, it appears that higher markup versus more intangible capital models are observationally equivalent. But in our open economy setting, the two models exhibit very different dynamics in transitioning from one balanced growth path to another. In particular, if illiquid capital becomes more important, the model predicts periods of very large (and counterproductive) current account deficits, as the US borrows for investment. Because valuation gains reflect new capital accumulation there is no gain for foreign owners of US firms—anyone who finances an unmeasured investment returns that capital in the future.
In conclusion, increasing international equity diversification has created powerful new channels to push across national boundaries. A rise in US equity prices in the context of substantial foreign ownership of US equities has led to a decline in the US net foreign asset position. The rest of the world needs to finance this net debt, in anticipation, as the US continues to run a larger trade surplus. Our preferred explanation for the rise in US equity prices is that US firms unexpectedly became more profitable, while foreign firms did not. In a closed economy, this shock would redistribute American farm owners at the expense of American workers. In our open economy model, Americans are even worse off: A large share of the lost income of American workers accrues to the foreign owners of US firms. Nevertheless, this redistribution may be effective from a retrospective perspective. A key open question here is whether US profits are rising because of the rise of very productive superstar firms (Bakai and Farhi 2017) or alternatively because US markets are becoming less competitive (Phillippon 2020). In the first case, the shock is fundamentally good news for Americans, and migration abroad can be effective. In contrast, the second scenario is a bad news shock for the US, and high migration abroad makes a bad situation worse.
Atkeson, A, J Heathcote and F Perry (2022), “Ending Rights: A Re-Examination of the Net Foreign Asset Position of the United States”, CEPR Discussion Paper 17268.
Baqaee, D and E Farhi (2017), “Aggregate Productivity and the rise of mark-ups”, VoxEU.org, 4 December.
Farhi, E and F Gourio (2019), “Accounting for Macro-Finance Trends”, VoxEU.org, 10 March.
Gourinchas, PO and H Ray (2007), “International Monetary Adjustment”, Journal of Political Economy 115(4): 665–703.
Gourinchas, PO and H Rey (2014), “External Adjustment, Global Balance, Valuation Implications”, in Gopinath, G, E Helpman and K Rogoff (eds), Handbook of International Economics, vol. 4, edited by. North Holland, 585-645.
Greenwald, D, M Letau and S Ludwigson (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.