Evolution of the US External Position

US external accounts are summarized by two accounting identities: flows and stocks; the CA balance is the broadest definition of the external balance, comprising all flows of US income from foreigners minus foreign income from US residents; the CA also equals the net flow of financial assets; the NIIP reflects the net stock position across all financial assets:
- CA Balance = Goods and Services Balance + Net Investment Income + Net Unilateral Transfers
- US NIIP = US Claims on Foreign Assets – Foreign Claims on US Assets (p. 9)
The CA has been in deficit since 1982 and has cycled between deteriorating in the early 1980s, partially recovering through the early 1990s, falling continually through 2006, rapidly increasing in the wake of the 2008 financial crisis, stabilizing until the Covid pandemic, and again deteriorating in recent years; as of 2024, the CA balance is at its lowest level since the 2008 financial crisis at -4% of GDP; the trade balance is the main driver of the CA and parallels its path. (pp. 9-10, Figures 1-2)

Net investment income has been in continuous surplus despite an increasingly negative NIIP, reflecting corporate profit shifting, and experienced a significant boost after 2008 by extremely low US interest rates with the reversal to more normal rates playing a significant role in the recent deterioration of the CA; net universal transfers have been in a stable deficit except for the impact of transfers related to the Gulf War. (pp. 10-11)
The real effective exchange rate and the petroleum balance are two main drivers of the trade balance and hence the CA; the real effective exchange rate measures the competitiveness of US manufactures and services, helping to determine exports and imports of these products; the petroleum balance is the dominant component of trade in commodities, reflecting both the price of oil and the location of production; the importance of these two factors have changed over time; recent deterioration in the CA balance reflects a decline in the trade balance and a decline in the income balance as US interest rates rose. (pp. 11-12, Figure 3)

Prolonged CA deficits shave been associated with a decline in the US NIIP; the rapid decline since 2010 is real, reflecting differing valuation changes in US and foreign equity markets; mismeasurement means that the final position is more like -70% of GDP. (pp. 12-13, Figure 4)
The US has financed its deficits primarily through debt sales, with a smaller contribution from bank inflows; there has been no deterioration in the balance on equities; the NIIP also reflects valuation effects that have been negative on net since 2017; gross holdings of foreign assets and liabilities for both debt and equity have risen massively over time implying that financial factors have become increasingly important in determining the current account. (pp. 13-15, Figures 5-6)
The US NIIP moves inversely to the market’s assessment of the strength of the US economy; the decline in the NIIP reflects a new bullish attitude toward the US economy as reflected in the strength of US equities compared to foreign ones and an appreciation of the US dollar; US dollar appreciation reflects a positive view of the US by investors though its impact on US residents is ambiguous as a strong dollar makes imports cheaper, improving purchasing power through terms of trade, but lowers the relative wealth of US investors who own assets denominated in foreign currencies. (pp. 15-16)
An alternative view sees the boom in US equities as negative, reflecting a shift in US income from labor to capital; however, such a shift can also be seen as positive, as a form of risk insurance and a comparative gain resulting from technological innovation that boosts labor income; the relative performance of the US versus UK NIIPs illustrates that the deterioration of US NIIP reflects the strength of US economic prospects. (pp. 16-17, Figure 7)