- 16-

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.


-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 <listinction
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, IIP) 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 asset:s, 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


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-3-

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 move 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
IIP 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 dat:a sources—-both published and unpublished--that are used in construct-
ing 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


-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
movenents are factored in, as are discontinuities where they can be identi-
fied. 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 LIP 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.

7. 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.


Line

10

11

12

13

14

15

16

-23-
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.


- 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 Int:ernational Finance Discussion Paper #239 (April 1984).


-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 apprecia-
tion, lie behind the “deterioration” of the U.S. current account since 1982,
they are the same which account for most of the measured “worseningTM 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 currercies.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


-6-

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. (IIP 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


IFDP
NUMBER

295

294
293

292

291

290
289

288

287

286

285

284

283

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
the Yen/Dollar Exchange Rate: 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.S., Japan and
Europe

Comovements in Aggregate and Relative
Prices: Some Evidence on 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.


- 26 -

Line Description and Sources

58 Investment Company Institute: Money Market Funds: Eurodollar CDs.

59 Sum of lines 60, 61, 73, and 77.

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

61 Sum of lines 62, 65, and 69.

62 Sum of lines 63 and 64.

63 Domestic Bank Call Reports: Loans to foreign official
institutions.

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

65 Sum of lines 66, 67, and 68.

66 Domestic Bank Call Reports: Loans to foreign banks.

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

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

69 Sum of lines 70, and 71, less 72.

70 Domestic Bank Call Reports: C&I loans to foreigners.

71 Foreign-Related Bank Call Reports: C&I loans to foreigners

(current report form excludes IBF loans).

72 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).

73 Sum of lines 74, 75, and 76.

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

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

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


- 3b-
TABLE 2*

Table 2.~International Investment Position of the United States at Yearend, 1970-84

[Millions of dollars}
Line ‘Type of invest ment io | as | istz | isa | 190 3] 1976 | 1977 | 197 | ist | 1980" | 19e1° | 1982’ | 1983" | 19K
7
1 | Net_international investsrent of} 88473) 45.511} 37,036] 47.994) 58,731, 74.240 7 re | an | ¥ | 5
‘the United line 1 Te Fenition i 83.578 }2.741 15 | 94,457 | 106,035 | 140.700 | 146,967 | 106.215 | 28,245
2] U.S, assets abroad.. 165,385 295,100 | 347,160 | 379,106 | 447,847 | 510.563 | 606,865 | 719,683 | 838,962 090.826 | 914.693
3 16.226] 18147| 193161 18,650 18.956 | 26756] soo7s| sa.957| 32.748] 34.933
4 rigiia os 11,599} 11,598 uy ey nie eid SY my Ws ed | iy nae
6 = re pee in ibe International 2212 4434 1,047 2,852 5,054 7,348 | 11,312 | en
7 Foreign carats | ' 8 321 co 4,374 3,807 | 10,134 9,774) 10,212 6,289 i 6.656
8 US. Government ssvets, other than 41,804 | 45,994] 49,544} 54,200] 58.423 | 63.544 68,447) 74,329 j 79,246 ; 84.635
Teeerve assets. i
9 US. loans and other long-term 36,187 | 36,268 | 39,809] 44,124 | 47,749 | 52,252 | ‘56,477 | 61,828) 67,002 | 72,660; 77,561 | 82,661
ty 30,617 | 33,030 | 45,154 | 49,817 | 54,085 | 59,604 | 64,722; 70.675; 75,691 H 80.844
ih] ua ita fas| tom] RS) ES] Ge] S| GR) HR) ERR] TES) HL) UP
currer: 1 ! Bi 4 B 974
Us shortierm west |
13] US. private assets seed 118) yAZT | 169,245 | 292,418 | 310,247 | 483,184 | 516,566 | 621,161 | 730,676 | 790,833 | 795,125
MM Direct investment 75,480 | 82,760 1.878 | 101,313 136, 145,990 | 162," 7 187,858 | 215,375 | 228,348 | 221,843 | 226,962 | 233.412
its 892 | 23,360 1383 | 21, 44,157 | 49,439 56,800 | 62,653) 63,452 | 75,672 | 84.270 | 89,875
16 14319} 15,719} 16,846} 17.420 1.71 39,329 | 42,148 | 41,966 487 | 45,791 698 | 57,719 | 61,973
ra 6,573 1,641 10,537 | 10,026 9.453! 10,110} 11.236! 14,834 17,661 | 18,974! 26.551 | 27/902
18 8 9, ‘11,427 | 13,767 20,31 22,256 s 31,497 28,583 | 35,096 | 24.829
nae | |
ty US. claims reported by ys. banks, | 13.837 16.919 | 20,739) 26,719 81,135 | 92,562 | 130,816 | 157,029 | 203,866 | 293,508 | 404.578 | 434,505 | 443,009
not included elsewhere i | | !
2 i Foreign assets in the United States. 106,912 | 133.493 | 161,658 | 174,536 263.582 | 306.364 | 371,730! 416,106 | 500.830 | 578,983 | 691,975 | 787.611 j 886,448
a Foreign official assets in the United | 26,151 | 52485 | 62,998 | 69,266 104,445 | 140,867 | 173,057 | 159,852 | 176,062 | 180,425 | 189,188 | 194,505 | 199,021
2 Us, Government se: ‘$3,777 ‘72,572 | 105,386 | 128,511 | 106,640 | 118.189 | 125,130 | 132,587 | 136,987 ' 142.909
903, 70,555 | 101,092 | 123,991 | 101,748 | 111,336 | 117,004 tas 929 Ly we | 135,359
4 874 '520| 4/892 | 6.853 | 8.126 | Hy 550
3 2,388 | 12,749 | 13,367 13.029 1 718 i 359 14.
6 12,595 540) 30,381 | 26,737 E 25,534, 26,197
a 306 9,923) 14,125) 15,529) 17,894) 17,716 | 15,194
2% | Other forvign meets in the United | 80,761) 81,008 | 96,660 | 108,270 256,254 | 324,768 | 398,558 | 502.787 | 593,106 | 687.427
r-} ae investment in the United ‘13,270 | 13,914} 14,868 | 20,556 | 25,144 | 27,662 54,462 | 83,046 | 108,714 | 126,677 j 187,061 | 159.571
bd 1,159 958 1,655, 4,245 14210 | 16,113 | 18,524 33,922: 56.870
a 693 | 46,116 | 34,892] 45,663 587} 74,114] 75,353 | 93,567 | 114,710 | 128,201
Bd 11,634 | 12,600 | 10,671 | 10,025! 11,964) 11,456 | 11.457) 10,269 9,545 | 10,727) 16, 17,454 | 32.290
3 39,050 | $3,516) 24,221 | 35,638 | 42949 | 39,779 | 42. 48,318 | 64,569 | 64,626 | 76,762 | 97,256 i 95.911
uM 10,714) 11,712 13,905 | 12,961 | 11,921 | 16.019 | 18,669 | 30,426 | 90,606 | 27,459 | 26,790) 30.488
| |
35 us" reported by US. (22,680! 16.454) 21,226! 25,928 | 41,846 } 42475 | 53,465 | 60,184} 77,719 | 110,826 | 121,069 | 165,361 | 231,282 | 280,623 | 312,297
i flats not inclu elsewhere | I i i Hl

» 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 milion, consiting of $828 million gold rock, $155 million spe-
cial drawing rights (SDR), and .S. reserve position in the International Monetary
Fund GMS ont October 18.1913. t $1,436 mili of $1,165 million
Goud sack, $517 tillon SDR. and $84 rollin reserve. poston inthe IMF ‘The gold stock a
Yalued at $35 per fine troy ounce until May 8, 1972; 1 heteaer, at #58 per fine troy ounce unt
Qader 18, 1973, pursuant to the Par Value Modification Act (PL. 92258) and, thereafter, a
S42 per fine troy ounce pursutat to'an amendavent tn Pa 39-110) to the Par Value Modiicw
tion AGL. Beginning in I8ft, the value of the SDB in which the US. holdings of SDR and the
yen postion ip she IMF. ore denominnsad, Qnchusten bere, oa the weigh average of,
change rates for the rincipal are valued
SEL we ile fpr hong Tanda set chang Shera

2. Also includes paid-in capital subscription to financial institutions and outstand-
ing amounts of miscellaneous clnima that have been settled through internationel agreements 10
be payable to the U.S. Governmnt over periods in excess of 1 year. Excludes World War I debts
that are not being serviced.

4 Includes indebtedness that ihe borrower may contractually. or at its option, repay with ite
currency, with a third country's curreecy, or by delivery of materiale of services.

*

4. Estimates are linked, for 1977 forward, to the U.S. Department of Commerce 1977 bench-
mark 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.

§. Breaks in the series reflect in 1971 and 1972, expanded reporting coverage: in 1978, expan
ed coverage of bank holding coropaniea and of broker’ and sovarty dealers reporting of hab
ities; in 1981, expanded coverage of brokers’ and security dealers’ reporting of claims; and in 1977
‘and 1962, an increase in reporters’ exemption levels.

yy Batimates include remuts of 1974 and 1978 portfolio benchmark surveys conducted by the

t of the ry. Beginning with the 1978 benchmark, marketable Treasury
Bande tte valued at market prim prevculy they were valued et scquntion pics

8. Primarily includes U.S. Government liabilities associated with military sales contracts and

er transactions arranged with or through foreign official agencies.

© Eaimaten are inked, for 1980 forward, to the US Department of Commerce 1980 bench
mark survey; for 1973-79, to the Commerce 1974 benchmark survey; and through 1972 to the
Commerce 1959 benchmark survey.

Nort.—Revised area tables for 1910-64 are available upon request from the Balance of Pay-
ments Division (BE-S8), Bureeu of Economic Antlyain US. Department of Commerce, Washing
ton, DC 20230.

Krom the June 1985 Survey of Current Business.


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-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 iff 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 avail-
able 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 t:hat 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 y:leld more than the costs of the borrowed funds, the net income of the


-5-

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
symmetric 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
permit:ted 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 mst 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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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.


-8-

The FOF treatment follows Commerce, and uses Commerce data, 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 bi Llion
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) (atbte)
1. Net position or change 4 -95 7-24 7 -112 -107
(line 2 less line 3)
2. U.S. assets abroad 898 32 12 ll 55 952
3. Foreign assets in the U.S. 894 127 36 3 166 1060

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


-7-

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 invest~
ment 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 account
ing. 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.


Line

99

00

ol

02

03

04

FRB =

SCB =

FRBNY
TIC =

Same

Same

Same

Same

Same

Same

as

as

as

as

as

as

- 28 -

Description and Sources
line 75.

line 76.
line 13.
line 16.
line 12.

line 15.

Appendix Abbreviations

Federal Reserve Bulletin

Survey of Current Business, either International Investment

Position (IIP) tables published annually, in June, or quarterly

Balance of Payments (BOP) material.
= Federal Reserve Bank of New York releases
Treasury International Capital reports


-27-

Line Description and Sources
77 Sum of lines 78, less 79, and 80.
78 SCB: LIP Table 2, line 8: U.S. government assets, other

than official reserve assets.

79 SCB: LIP Table 2, line 12: U.S.
foreign currency holdings + short term claims.

80 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.

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

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

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

84 Same as line 80.

85 Same as line 79.

86 Sum of lines 87 less 88.

87 SCB: IIP Table 2, line 14: Direct investment abroad.

88 Same as line 29.

89 Sum of lines 90, less 91 through 04,

90 SCB: IIP Table 2, line 13: U.S. private assets, less line 17:
Corporate stock, less IBF liabilities abroad.

91 Same as line 87.

92 Same as line 61.

93 Same as line 82.

94 SCB: IIP Table 2, line 16: Bonds.

95 Same as line 58.

96 Same as line 81.

97 Same as line 57.

98 Same as line 74.


-4-

considered separately.9/ Additionally, FOF data are gathered from diverse
sources (é.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 LIP statistics.10/ Using the bank call data, FOF departs from the
clear asset/liability split found in the LIP 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 benks 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
LIP 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


- 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.

1l. “Foreign-related” banks consist of U.S. branches and agencies of
foreign banks, Edge Act corporations and New York Investment Companie:
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 LIP
statement is not necessarily a good measure even of potential pressure 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 of 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 exchange-
markets 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 rat:e, which
can be swift and violent on occasion.


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-
ness.

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, cor-
porate 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 Transactions,
Tine 1, capital. Level is incremented by flow.

FOF estimate.
No longer shown separate from trade credit: Assumed = Oo.
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 securi-
ties.

Sum of lines 36 and 37.


-2-

International Investment Position provides a convenient opportunity to expand
the earlier effort into the realm of outstandings. The initial portion 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 mch 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
IIP 106.0 140.7 147.0 106.2

28.2


-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 the Commerce statement deal with debtor
positions per se. The statement as a whole, most economists would agree,
just provides a rough measure of the scale of U.S. international engagement
and, some would argue, a measure of the amount of assets which could be
mobilized in a real panic. Some 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. But historically it is not at all clear that these
two phenomena are well connected. As the table below illustrates, during
the past 15 years the dollar has 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.


-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 vis-
a-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 IIP toward net negative balances also arouses
fears, in part, because continued U.S. current account deficits are consid-
ered 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 1elative to investment, which pushes downward on the current
transact:ions 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)


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 recon-
cilable 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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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 (IP)
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.


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:

Same
Same
Same

SCB:
plus

Same
Same
Same
Same
Same
Same
Same
Same

Same

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

as line 8.

as line 9.

as line 20.

IIP Table 2, line 27:

line 32: Corporate and other bonds.

as line 34,

as

as

as

as

as

as

as

line

line

line

line

line

line

line

line

Sum of lines

33.
18.
31.
30.
36.
ll.
14,
17.

53, 56, 59, 81, 82, and 83.

Sum of lines 54 and 55.

FRB:

FRB:

Table
position in

Table
currencies.

3.12, U.S. Reserve Assets, line 4:
IMF.

3.12, U.S. Reserve Assets, line 5:

Sum of lines 57 and 58.

FRB:

Other foreign official assets,

Reserve

Foreign

Table 3.23, Claims on Unaffiliated Foreigners, line 6:
Deposits, payable in dollars.


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
adds 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.S. “debtor” position.


-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 72.5
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 convent:ions.
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.