No.
The Net International Investment Position (NIIP) is a simple accounting concept. It is the total value of foreign assets owned by Americans in other countries minus the total US assets owned by foreigners. A positive number means that the value (but not the returns) of US-owned foreign assets is greater than the value (but not the returns) of foreign-owned US assets. A negative number means that the value of US-owned foreign assets is less than the value of foreign-owned US assets. More precisely:
What is the international investment position?
The accumulated value of U.S.-owned financial assets in other countries and U.S. liabilities to residents of other countries at the end of each quarter. The difference between assets and liabilities is the U.S. net international investment position.
Like a trade deficit,[1] a negative number here conjures images of indebtedness and financial disaster. And, like a trade deficit, that image is false. Of course, debt can be part of the equation, but it isn’t all of it. In fact, foreign holdings of US debt are falling. Americans are becoming less indebted to foreigners.
But another way the NIIP can be misleading is that, much like the trade deficit, it only captures international transactions, not all transactions. These transactions represent just a fraction of the total US financial market. Consequently, a negative may look like more and more of the nation is becoming foreign-owned. But the reality is just the opposite.
The US Treasury recently released a report on foreign holdings of US financial securities. Figure 2 is quite telling. It breaks down foreign and domestic holdings by type. One thing we see is that the share of US assets owned by foreigners has been generally flat/mildly falling since about 2009. Foreign-owned US assets have accounted for about 20–21% of US assets over the past nearly-two decades. But how can this be when NIIP has fallen over the same time period?
The answer is simple: Both foreigners and Americans want to invest in America. Foreigners invest in the US, so that shows up in the NIIP. But Americans also want to invest more in the US than abroad, so those investments do not show up in the NIIP. The NIIP is falling since the negative side of the equation is getting more negative and the positive side is not rising as fast. But, since America remains a productive place, the value of US assets is rising. Americans are getting wealthier and buying more assets than foreigners are. So, the NIIP falls, but their share of US-owned assets stays the same. The NIIP here is our strength, not our weakness.
For the sake of demonstration, assume the following:
- US-owned US assets: $80b
- Foreign-owned US assets: $20b
- Total US assets: $100b
- US-owned foreign assets: $10b
From these numbers, the US NIIP would be -$10b ($10b – $20b) and foreign holdings of US securities would be 20% of the total. Now let’s assume some time has passed, and now we have these numbers:
- US-owned US assets: $96b
- Foreign-owned US assets: $24b
- Total US assets: $120b
- US-owned foreign assets: $10b
After this time period, the US NIIP would be -$14b ($10b – $24b), but foreign holdings would still be 20% of total US securities. Americans chose to invest their money in the US, not overseas. Consequently, NIIP falls, but that’s just because Americans are choosing to keep their money domestically!
Paradoxically, if one wants to reduce the NIIP, one must somehow convince Americans to increase their investments abroad and/or convince foreigners to decrease their investments in America. Of course, one way to do that is to make America less competitive through “economic statecraft” (or is it “economic nationalism?” “Reciprocal tariffs?” The buzzwords change so fast). But in the same way that one way to kill a spider is to burn down one’s home, these tariffs do far more harm than good. They are not ideal or even helpful.
Value is all well and good, but returns matter, too. Here we see another paradox: American returns on foreign investments are higher than foreign returns on American investments. In other words, Americans make more on their foreign investments than foreigners make on US investments. Why? Because, again, of how great America is. American securities are relatively safe compared to the rest of the world. So, foreigners want to keep their money safe and invest it here. Americans also obviously take advantage of that safety and invest heavily in America. But they also go after higher interest rates abroad, thus bringing in higher returns. See here.
Fear is the mind-killer. Fear shuts down rational thought and leads to obliteration. And fear comes from a lack of understanding. Both the trade deficit and the NIIP have inspired a lot of fear in those who do not understand them. They see a negative sign and assume negative outcomes. Fear of foreigners owning everything springs unbidden to their minds. I have written about the irrationality of these fears before. Just as they were in the 1980s, they are irrational now.
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PS: One other interesting note from that Treasury report: US government debt is becoming less owned by foreigners. Foreigners are opting for corporate debt and equity. This makes me even more skeptical that simply balancing the federal budget would eliminate the trade deficit.
[1] A quick note: the trade deficit and the NIIP are related, but not identical. The trade deficit is a flow. The NIIP is a stock.
READER COMMENTS
Kevin Corcoran
May 7 2025 at 12:46pm
The instant I saw this post my first thought was “This is a textbook case of Betteridge’s Law of Headlines, because the answer is obviously no.”
Jon Murphy
May 7 2025 at 12:52pm
I didn’t know the tactic had a name
Kevin Corcoran
May 8 2025 at 9:20am
It’s been a thing for a while, but the tendency has really been amplified in the age of internet clickbait titles – the prototypical case being headlines like “Has this group of rogue researchers finally found Atlantis?”
Jose Pablo
May 7 2025 at 12:58pm
After this time period, the US NIIP would be -$14b ($10b – $24b), but foreign holdings would still be 20% of total US securities.
But both the -$14 billion figure and the 20% ownership share are largely irrelevant. What truly matters is that, in your example, Americans have become $16 billion richer.
I don’t know you (though I have a strong suspicion), but personally, I’d much rather own 1% of a $100 billion company than 100% of a $100 million company.
I couldn’t care less about the trade deficit or the NIIP over the past 50 years. What I do care about is how incredibly wealthier Americans have become over that time.
Jon Murphy
May 7 2025 at 2:31pm
I agree wholeheartedly with you. I should have made the point about increasing wealth more explicit
Jose Pablo
May 7 2025 at 2:32pm
In fact, foreign holdings of US debt are falling. Americans are becoming less indebted to foreigners.
That’s a pity. The more they wanted of this incredible bargain for America, the better.
Extremely cheap (the cheapest you can find in America), non-recourse, covenant-free debt? … bring me as much as you can of that stuff!
It is truly bad that they don’t want more American government debt.
David Seltzer
May 7 2025 at 3:39pm
Jon: You make an interesting point for return on investment. Assume I’m a hedge fund manager. My sole responsibility is generating returns on investment adjusted for risk. Assume our investors are comfortable with a market risk beta of 1.2. Market risk plus 20% I will allocate our portfolio to both domestic markets and emerging foreign markets to achieve the combination of risk and safety reflected in that risk/reward combination. By contrast, our markets are seen as safer in terms of risk and more risk averse foreign investors buy our assets. Foreign investment means we get dollars added to domestic dollars, increasing the net supply of dollars. Interest rates remain stable or lower. More bucks from foreign investment and savings and lower rates, mean individuals can invest in anything that improves production. More innovation. More education. More startups, I could go on, translates into greater wealth. Of course, I could be wrong.
Jose Pablo
May 7 2025 at 6:29pm
Of course, I could be wrong.
No, you are not. That’s exactly what has happened in the US.
The mystery is why some people want to put an end to this.
Schoeck’s “Envy” comes to mind.
David Seltzer
May 7 2025 at 6:34pm
Thank you Jose.
Ahmed Fares
May 7 2025 at 4:20pm
Brad Setser tweeted this a few days ago:
source with chart: Brad Setser – Tweet
Jon Murphy
May 7 2025 at 4:44pm
Yeah, that tracks with what I said.
Warren Platts
May 9 2025 at 3:08pm
First, let’s clear up some factual stuff. You’re Treasury paper only discusses portfolio investment (defined as less than a 10% ownership share). Their TIC database doesn’t cover direct investment (defined as a more than 10% ownership share). As documented by Rosenthal & Burke (2020), just looking at equity markets (both publicly traded and private), foreign ownership is around 40% (in 1965, it was 4%). Their interest was in raising tax revenue, and foreign owned equities are, for the most part, not taxed.
Furthermore, if you have a negative NIIP, you are by definition a debtor nation. You had it right when you said NIIP is the difference between foreign owned US assets and US owned foreign assets. It’s all assets. The only difference between a debt instrument and an equity is that the former sends money to foreigners via interest payments whereas the latter sends dividends and capital gains. The effect on the current account (CA) is the same. It is like the remittances that immigrant workers send home: they are drain on the current account.
Now to the meat of the issue. The problem is not negative NIIP per se. The NIIP number by itself is meaningless. In fact, NIIP/NGDP is not even the most relevant. What really counts is the rate of increase in the of the absolute value of a negative NIIP/NGDP. Why? Because mathematically, you get to the point where the debt service exceeds the entire NGDP. I would think that should be a concern.
Of course it never gets to that point. You write: “if one wants to reduce the NIIP, one must somehow convince Americans to increase their investments abroad and/or convince foreigners to decrease their investments in America.” However, that is not the only way to reduce NIIP. In fact, the scenario you propose happens extremely rarely. What happens the vast majority of the time is that foreign creditors convince themselves that they need to cut off all investment — and this doesn’t happen gradually, it happens all at once.
Consider the various financial crises over the last 30 years. I’m thinking the PIIGS euro crisis, the Icelandic banking crisis, and the South Asian financial crisis. There are lots of different moving parts among all these countries, but what they all had in common, however, is that they all large and growing negative NIIPS.
This is a problem because high negative NIIP/GDP ratios indicate structural weaknesses like an overreliance on foreign capital, unsustainable debt burdens, and thus risk the ending of all foreign credit overnight. Note that foreign investor confidence depends a lot on the overall global economy. When times get tough, they tend to lose their confidence. Thus the GFC triggered the debacles in Iceland and the PIIGS.
Therefore, if you want to seriously argue that the NIIP doesn’t matter, then you either have to say that all those financial crises are in themselves no big deal, or that the USA is somehow different (reserve currency, strong central bank, that sort of stuff).
Thus the problem for USA is that not only is the negative NIIP/NGDP getting big (if Trump doesn’t put a big dent in the trade deficit this year, it will be -100% in 2025), it keeps getting bigger: in 2007, NIIP/NGDP was -8.7%; now it’s -88% — an order of magnitude increase — with no obvious sign of slowing down.
This is not sustainable. It will reverse itself with 100% certainty. However, there are two options: we can manage it ourselves or we can let nature take its course. The latter will be ugly: the bigger they are, the harder they fall; it could spell the end of the USA as a great power. Therefore, it would behoove us to manage the NIIP ourselves.
The first step is to stop the bleeding by stabilizing NIIP/NGDP. In general, if the following equation is satisfied:
CA/NIIP = g
(where g is the NGDP growth rate), then the NIIP/NGDP will stabilize.
(Note that under this scenario, it is possible for both CA and NIIP to increase indefinitely as long as CA/NIIP increases slower than NGDP. For example, again ignoring valuation, if NGDP were to grow at a steady rate of 5% per year whereas the CA only grow by 1% per year, then after a hundred years, our NGDP would be $4 quadrillion, our CA would be negative $4 trillion per year, NIIP would be negative $300 trillion, but the NIIP/GDP would have declined from -100% to 7.25%.)
If we could stabilize the U.S. NIIP at -100% of NGDP, the question then becomes whether foreign investors will be content to keep investing even if the NIIP/NGDP is at -100%. As long as the global economy is humming along fine, then probably yes. But as we saw with the Eurocrisis, if the globe hits a bump in the road, foreign investors could suddenly lose confidence.
Would this work for the United States? Well, there was a 10-year period from 2010 to 2019 where NGDP growth was roughly steady at 4% and the CA was basically flat (it actually improved slightly by 4% over the 10-year period). Under those conditions, the negative NIIP/NGDP should have contracted by maybe 8%. But guess what happened: the opposite of course. NIIP/NGDP expanded by a factor of 3.3X from -0.16% in 2010 to -0.53% in 2019. So clearly, valuations are killing us. The strong USD relative to other currencies is certainly a big part of that story. And of course, the CA itself has taken a nosedive since 2019, expanding from -$400 billion to -$1.1 trillion in 2024.
Bottom line, we are running headfirst as fast as we can toward a brick wall. Me, the geologist, shouldn’t have to be the one to figure this stuff out. I’ve got my head up: I see the wall getting closer. Yet the attitude among mainstream economists is apparently the same as the late Alfred E. Neuman: “What me worry?”
PS I agree with your PS, Jon, that ending the fiscal deficit will not end the trade deficit. As long as the mercantilist countries insist on running trade surpluses, and as long as we acquiesce in absorbing their surpluses, then the debt burden will simply shift from the government sector to the private sector. imho as long as we’re going to run a CA deficit, it’s almost better to let the government handle the debt as they have more tools to deal with it.