defect of the balance - sheet figures? 2 friedman's question suggests that the reported data must either be wrong or be missing some important component. following this reasoning, some researchers have inferred the existence of unrecorded u. s. claims based on the observation of positive net investment income. such unrecorded claims are sometimes called “ dark matter ”. the term is borrowed from physics ; dark matter cannot be seen, but its presence can be inferred from its effects on visible matter. these researchers suggest that unobserved assets, particularly intellectual property, are so large that the true claims position substantially exceeds the $ 20 trillion in u. s. liabilities to foreigners. a careful look at the data, however, reveals that while unrecorded intellectual property may make a modest contribution to u. s. claims, there is no evidence of large - scale mismeasurement on the order of magnitude claimed by proponents of the “ dark matter ” theory. in fact, federal reserve staff research suggests just the opposite – that is, if letter to charles thomas of the federal reserve board staff. anything, the true u. s. net investment position is slightly more negative than the published data show. how then can we resolve this puzzle? the answer lies in the returns, composition, and size of u. s. claims and liabilities. as i mentioned earlier, for most cross - border assets, including debt and equity, the income component of the return paid on u. s. liabilities is roughly equal to that received on claims. the return received on u. s. direct investment claims on the rest of the world, however, is much larger than that paid by the united states on its direct investment liabilities to the rest of the world or on any other asset. additionally, direct investment is a greater share of u. s. claims than it is of u. s. liabilities. with this combination of return and compositional differences, u. s. claims in total earn about one percentage point per year more than the united states pays on its liabilities. this rate of return differential does not, by itself, lead to positive net income on a negative net position : if the u. s. net liability position of $ 2. 5 trillion were the result of more modest gross positions, then u. s. net income might not be positive. the enormous gross positions magnify the impact of the different rates of returns on claims and

by u. s. residents abroad and by foreigners in the united states are enormous, both in absolute terms and as shares of gdp. ( see figure 1. ) last year, for example, u. s. liabilities to foreigners totaled more than $ 20 trillion, exceeding 140 percent of u. s. gdp. at the same time, u. s. claims on foreigners totaled $ 17. 5 trillion, roughly 130 percent of u. s. gdp. even the net liability position of the united states is sizeable, $ 2. 5 trillion or more than 17 percent of gdp. this net position as a share of gdp has remained fairly constant in recent years, while gross claims and liabilities have both been growing steadily. second, within these enormous gross positions is a great variety of types of claims and liabilities, including many forms of direct investment, equity securities, and debt instruments. 1 ( see figure 2. ) the composition of u. s. liabilities is quite different than the composition of u. s. claims on the rest of the world. for example, more than two - thirds of u. s. liabilities are in the form of debt instruments, while over half of u. s. claims are in equity securities and direct investment. some call this the “ venture capitalist ” nature of the u. s. external position : u. s. investments abroad tend to be concentrated in relatively risky equity instruments, but liabilities of the united states tend to be in low - volatility debt instruments. third, the different asset classes tend to have different rates of return for both capital gains and income. ( see figure 3. ) the return on equity securities ( both claims and liabilities ), for instance, is mainly from capital gains, while the return on debt instruments and direct investment is primarily from income. for debt and equity securities, the income return and the rate of capital gain on u. s. claims are roughly the same as those on u. s. liabilities. this is not true, however, for direct investment : the income return on direct investment by the united states in other countries is more than twice as high as the income return foreigners receive on their direct investment in the united states. taking into account the differences in returns and the differences in the composition of assets, the total return on u. s. claims turns we include bonds, loans, and deposits with debt instruments. out to be about 2 percentage points per year higher than the