What is the difference between say, gross asset and liability positions and net asset and liability positions? I mean these terms in the particular way that Cavallo and Tille use them in their 2006 paper "Could Capital Gains Smooth a Current Account Rebalancing?" Can they be expressed as an accounting identity? The key factor in this paper is that gross asset positions change but NFA positions are kept constant. This is true by construction, but how? I could understand this if I just understood generally how net and gross positions are different.


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The assets and liabilities are what make up what is called the International Investment Position, often broken down into three main parts:

  • Direct investment: subsidiaries abroad or domestic companies with foreign owners, where their full profits or losses count as overseas income for the balance of payments
  • Portfolio investment: foreign shares and bonds or domestic shares and bonds owned by foreigners, where the dividends and coupons count as overseas income for the balance of payments
  • Other investment: including foreign bank accounts and loans, where the interest counts as overseas income for the balance of payments; there are also derivatives and reserves

When these are added up, the amounts involved are big league (to channel President Trump). At the end of 2016 the US had gross assets abroad worth about USD 24 trillion and gross liabilities to foreigners worth about USD 32 trillion, each more than US annual GDP. (The UK gross positions are even more extreme)

The net International Investment Position is simply the difference between gross assets and gross liabilities, so with the US having a net liability of about USD 8 trillion at the end of 2016

One might naively think

  • having a persistent current account deficit might lead to steadily widening net liabilities as financial flows need to balanced current account flows
  • having a net liability could lead to a deficit on income flows (if you owe more you might pay more), making the current account deficit difficult to close even if trade in goods and services moved into balance

That was not what was observed in the paper and so two rationalisations were offered

  • US assets abroad seemed to be paid a higher rate of return than US liabilities to foreigners for specific reasons
  • US assets overseas had been revalued over time (for reasons such as exchange rate changes or market price changes) so the net position had not exploded

The rest of the paper speculated that this sort of process could lead to a smoother transition to a current account balance than one might otherwise naively think, especially if accompanied by currency depreciation. It combined this with some mathification and a toy numerical illustration


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