National savings and the international investment position: what does the current account tell us?

This article discusses the relation between the balance of payments and the international investment position of countries. It starts with the observation that the net international investment position of many countries is developing independently from their current account balances. This phenomenon can be explained by valuechanges of cross border assets and liabilities that are not registered on the balance of payments. These value changes have impact on the net external investment position of a country as soon as the returns on its external assets and liabilities start to diverge. Such divergent developments can be attributed to currency developments,differences of composition of external assets and liabilities and performance effects. These mechanisms are discussed, followed by two case studies, viz. the case of the ‘black hole’ (the Netherlands) and the case of ‘dark matter’(the US). Understanding the relation between the international investment position of a country and its balance of payments becomes more and more relevant as countries prepare for ageing of the population. Some countries explicitly aim at the creation of a national savings surplus in order to create a net international asset position. The consequences of the failure of such a policy are discussed in a concluding paragraph.