As Tim Taylor notes, the U.S. net international investment position — the difference between US assets abroad and foreign claims on the US — has moved substantially deeper into the red in recent years:

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But why? You might be tempted to say that it’s obvious: we’ve been running big budget deficits, borrowing the money from foreigners, so of course our debt to those foreigners is surging. But that story implicitly requires a surge in the trade deficit (or more precisely the current account deficit, which includes investment income), which hasn’t happened. In fact, current account deficits have been small compared with those of the bubble years:

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So it’s not about borrowing vast sums abroad, it’s some kind of valuation effect. But what is it?

Well, I’ve taken the BEA data, and broken out two categories. First is cross-border equity holdings, both in the form of portfolio investment and the equity component of direct investment (which means investment that involves control, typically in the form of corporate subsidiaries). Second is debt, again both portfolio and direct investment-related. I express these claims as percentages of GDP, to correct for “normal” growth on both sides of the ledger. Here’s what I get:

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The big move is a sharp rise in the value of foreign holdings of US equity, not matched by any comparable rise in US holdings of foreign equity. What’s that about?

The answer, I believe, is that we’re looking at the differential performance of stock markets. Here, for example, is the S&P 500 compared with the euro area Stoxx:

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So the value of foreign holdings of US equities (and the imputed equity component of foreign direct investment) has surged along with the Obama stock market, while US holdings abroad have seen no comparable boost.

And this means that the plunge in the U.S. international investment position, far from showing weakness, is actually a symptom of US relative strength, reflected in strong stock prices.

I think I’m right about this, although happy to hear alternative stories.