No.
The Net International Investment Position (NIIP) serves as a straightforward accounting measure. It calculates the total value of foreign assets that Americans own abroad, then subtracts the total value of US assets held by foreigners. A positive NIIP indicates that the value of US-owned assets overseas exceeds that of foreign-owned assets in the US (though this doesn’t account for the returns on those investments). Conversely, a negative NIIP suggests that US-owned assets are valued less than those owned by foreigners. To clarify:
What does the international investment position entail?
It represents the cumulative value of financial assets owned by Americans in other countries, alongside the US liabilities owed to foreign residents at the end of each quarter. The differential between assets and liabilities constitutes the US net international investment position.
Much like a trade deficit, a negative NIIP can evoke fears of financial ruin and overwhelming debt. Yet, similar to the trade deficit, this perception is misleading. While debt is certainly a component of the equation, it is not the whole story. Notably, foreign ownership of US debt is on the decline, suggesting that Americans are becoming less indebted to foreign entities.
Another point of confusion with the NIIP is that, akin to the trade deficit, it only reflects international transactions, omitting a comprehensive view of all financial activities. These international transactions represent merely a fraction of the entire US financial landscape. As a result, a negative figure might suggest an increasing foreign ownership of US assets, whereas, in reality, the opposite is true.
Recently, the US Treasury published findings regarding foreign investments in US financial securities. The data is revealing, showcasing a steady trend of foreign ownership of US assets hovering around 20-21% since approximately 2009. This raises an intriguing question: how can the NIIP decline while foreign ownership remains relatively stable?
The answer lies in the mutual interest of both foreign and domestic investors in US assets. Foreigners are eager to invest in the US, reflected in the NIIP. Simultaneously, Americans are increasingly opting to invest domestically rather than abroad, meaning these investments do not factor into the NIIP. The NIIP is declining primarily because the negative side is growing more negative, while the positive side isn’t keeping pace. However, as America continues to be a productive and attractive investment destination, the value of US assets is on the rise. This means that even though the NIIP is shrinking, Americans are accumulating wealth and assets at a rate that outpaces foreign investment. In this sense, the NIIP indicates our strength rather than a weakness.
To illustrate, consider the following hypothetical scenario:
- US-owned US assets: $80b
- Foreign-owned US assets: $20b
- Total US assets: $100b
- US-owned foreign assets: $10b
In this case, the US NIIP would be -$10b ($10b – $20b), with foreign holdings making up 20% of the total. Now, let’s fast forward and examine a future scenario:
- US-owned US assets: $96b
- Foreign-owned US assets: $24b
- Total US assets: $120b
- US-owned foreign assets: $10b
Now, the US NIIP would be -$14b ($10b – $24b), but foreign holdings would still constitute 20% of total US securities. This reflects a choice by Americans to invest domestically rather than overseas. Thus, while the NIIP declines, it signifies a domestic investment preference!
Ironically, to reduce the NIIP, one would need to persuade Americans to increase their investments abroad or encourage foreigners to decrease their investments in the US. One potential strategy could involve employing economic policies that make the US less appealing to foreign investors—such as tariffs and other forms of economic statecraft (or is it economic nationalism? The terminology seems to shift constantly). However, akin to exterminating a spider by incinerating your home, these tariffs often result in greater harm than good.
While asset value is significant, the returns on those investments are equally crucial. Herein lies another paradox: American returns on foreign investments tend to be higher than the returns foreigners receive from their investments in the US. Why is this? It boils down to the comparative safety offered by American securities, which appeals to foreign investors seeking stability. At the same time, Americans are drawn to the higher yields available in foreign markets. For further insights, see here.
Fear, as they say, is a powerful motivator. It can cloud judgment and lead to irrational decisions. Much of the anxiety surrounding the trade deficit and NIIP stems from a misunderstanding of these metrics. A negative sign often triggers alarm bells, leading to unwarranted fears of foreign domination over domestic assets. I have previously discussed the irrationality of such fears, which echo the sentiments of the 1980s and remain equally unfounded today.
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PS: An interesting takeaway from the Treasury report is that foreign ownership of US government debt is declining, with investors opting instead for corporate debt and equities. This trend further fuels my skepticism that simply balancing the federal budget would resolve the trade deficit.
[1] A brief note: while the trade deficit and NIIP are interconnected, they are not synonymous. The trade deficit represents a flow of transactions, whereas the NIIP reflects a snapshot of stock.
