Latest economic data coming out of the US Bureau of Economic Analysis (BEA) shows that America’s net international investment position is hurting with a big decline in the third quarter of 2020.

The BEA reports that America’s net international investment position declined by US$865.6 billion from the second quarter to the third quarter. This was as result of an US$870.3 billion decrease in net position excluding financial derivatives.

However, this position was slightly offset by a US$4.7 billion increase in net financial derivaties other than reserves. The BEA pointed out that the difference between U.S. residents’ foreign financial assets and liabilities was negative $13.95 trillion at the end of the third quarter of 2020.

This stems from assets totalling US$29.41 trillion with ballooning liabilities of US$43.36 trillion. Most notably at the end of the second quarter, the net investment position was minus $13.08 trillion, meaning the situation has worsened in the third quarter.

Dwindling net investment position quarter-over-quarter

According to the BEA, “the minus $865.6 billion change in the net investment position from the second quarter to the third quarter came from net financial transactions of negative US$219.9 billion and net other changes in position, such as price and exchange rate changes of minus $645.7 billion.”

The BEA reports that, “the full economic impact of the COVID-19 pandemic cannot be quantified in the IIP (International Investment Position) statistics because the impacts are generally embedded in source data and cannot be separately identified.”

In the third quarter of 2020, U.S. assets and liabilities continued to increase, reflecting increases in portfolio investment and direct investment assets and liabilities. This was due to the fact that most of the currency swaps between the U.S. Federal Reserve System and foreign central banks that remained at the end of the second quarter were ended in the third quarter.

Continued withdrawal of deposit assets

This contributed to the continued U.S. withdrawal of deposit assets and the continued U.S. repayment of deposit and loan liabilities. In addition, BEA explained that, “these currency swaps were initiated in the first quarter to alleviate the dollar shortage overseas at the onset of the COVID-19 pandemic.”

Separately, in the third quarter there was a record level of net shipments of American currency abroad to meet the demand for U.S. currency by foreign residents’ increased U.S. currency liabilities, partly offsetting the net repayment of U.S. deposit liabilities.

American assets went up by US$629.2 billion to end the quarter at US$29.41 trillion, reflecting a rise in portfolio investment and direct investment assets that were partly offset by a US$205.6 million decrease in financial derivatives other than reserves. Portfolio investment assets increased by US$684.7 billion to US$13.07 trillion while direct investment assets jumped by US$370.8 billion to US$8.32 trillion.

This was driven mainly by the appreciation of major foreign currencies against the U.S. dollar and by foreign stock price increases that raised the value of these assets. On the liabilities side, this rose by US$1.49 trillion to total US$43.36 trillion at the end of the third quarter.

This reflected increases in portfolio investment and direct investment liabilities that were partly offset by decreases of US$210.3 million in financial derivatives and in other investment liabilities. “Portfolio investment liabilities increased by US$967.8 billion to US$23.01 trillion while direct investment liabilities increased by US$762.3 billion to US$10.85 trillion, driven mainly by American stock price increases that raised the value of these liabilities,” the BEA reported.