By Jamie McGeever

ORLANDO, Florida (Reuters) – Foreign investors' claims on Uncle Sam have been greater than U.S. investors' claims overseas for decades, creating an imbalance that some analysts warn could lead to a crisis of confidence in the dollar.

That crisis has yet to arrive, and there are reasons to believe it may never happen. However, the U.S. is entering uncharted territory regarding its net debtor status.

The negative net international investment position, or "NIIP", is growing rapidly and has reached its largest size, both nominally and as a share of GDP, raising questions about the sustainability of American exceptionalism.

THE ONLY GAME IN TOWN

NIIP represents the difference in the value of foreign-held assets, including stocks, bonds, foreign direct investment (FDI), and other investments, compared to the domestic total held by foreigners, which are considered liabilities.

According to the Bureau of Economic Analysis, the U.S. NIIP at the end of June was a negative $22.52 trillion, or 77.6% of annual GDP, an increase of $4.27 trillion and 11 percentage points over the past year.

Recent years have seen not only the volume of these liabilities change dramatically, but also their composition. The U.S.'s net debtor status is increasingly attributed to equity-based liabilities. At the end of June, equity-related FDI into the U.S. was $14.77 trillion, and claims on U.S. equity portfolio assets reached $16.67 trillion, both nearly $2 trillion higher since December.

The contribution of equity flows and valuation changes to NIIP since the pandemic has been double that of bond-related dynamics.

Chris Marsh, senior adviser to Exante Data and former IMF economist, notes that the U.S. is evolving as a global innovator with shifting foreign appetite for claims on U.S. assets reshaping its external balance sheet.

Currently, the U.S. is a net debtor across all major measures of its external position: equity, debt, FDI, and other investments. While this seems concerning, it reflects confidence in the U.S. economy's relative strength and attractiveness.

Consequently, U.S. stocks now account for a record 72% of world stocks, up from around 63% before the pandemic. Jan Loeys, managing director of global research at JP Morgan, states, "U.S. companies are enormously profitable, and the economy is strong. Why go elsewhere?" He notes that the investment in U.S. strength is costly, but there’s no current trigger for seeking alternatives.

This influx has propelled trends in U.S. growth, corporate profits, and asset prices, benefiting U.S. investors. According to JP Morgan, U.S. households' equity allocation in total financial asset holdings has reached nearly 45%.

It appears a virtuous circle is forming. If America's external asset position is declining, it may not be a negative development.

WILL THE MUSIC STOP?

But can this last? There are no signs that foreign investors will offload U.S. stocks soon. Still, historical standards suggest that some valuations, especially among mega-cap tech firms, are becoming rich.

Uncertainties also abound regarding the sustainability of America’s economic boom and the long-term returns from AI investments. Should corrections occur, they could be painful if they persist.

Additionally, there’s America’s debt, which needs to be repaid or rolled over. Foreigners’ net claims on U.S. debt are nearing $11 trillion, mainly in Treasuries, the safest and most sought-after global asset, but this raises concerns.

Gian Maria Milesi Ferretti, senior fellow at the Hutchins Center on Fiscal and Monetary Policy, warns that while increasing liabilities can indicate a robust U.S. economy, borrowing leads to obligations that must be stabilized eventually.

While the current favorable conditions may continue, history teaches us that no situation endures, particularly those propelled by significant and widening imbalances.

(The opinions expressed here are those of the author, a columnist for Reuters.)

*(By Jamie McGeever; Editing by Lincoln Feast.)