What is NIIP and Why is it Important to You?
Net international investment position (NIIP) for the United States is the amount of investment we own in the rest of the world subtracted by the amount of investment the rest of the world owns of us. This is the same definition for any country.
Imagine two towns of equal size, isolated from the rest of the world and separated by a river. Let’s call the town on the near side of the river Nearville and the town on the far side of the river Farville. Each town has its own government, hard-working people, and a sense of civic pride. They also compete economically with each other.
Over time, while the people of both towns have worked hard and produced incomes for their families, the people of Farville have reinvested much of their incomes in building new equipment to grow their businesses while the people of Nearville are very near-sighted and have spent much more of their incomes on consumer goods. In fact, when Nearville runs out of things to buy in its own town, they often go to Farville and buy the goods produced there.
Now what do the people of Farville do with these extra funds from selling goods to Nearville. Well, they use those funds to buy parts of Nearville businesses, to lend money to Nearville businesses and government, and to even directly purchase land, buildings and equipment in Nearville in order to rent back to Nearville businesses. Why is Nearville willing to sell these items to and borrow money from Farville, to support their ongoing consumption. Both towns have hard-working people, but Farville looks farther into the future and focuses much more on turning income into investment while Nearville focuses more on consumption.
The net result is that Farville owns much more of Nearville’s productive capacity than the other way around. It owns more of the businesses, corporate debt, government debt, and capital in Nearville than Nearville owns in Farville to the tune of about $50 thousand per Nearville citizen. United States citizens are in the same situation as those in Nearville, with Farville representing the rest of the world. This makes the United States a debtor in a sense to the rest of the world at $50 thousand per US citizen.
So you might ask, who cares? If businesses are doing well and foreigners want to invest in the United States, what does it matter? Well, it really matters in a time of crisis, such as a pandemic or a war, when we don’t own the means of production in our country and are overly dependent on other countries to obtain the goods that we need. We only have to look to the Covid-19 pandemic to see a prime example of a time when we were cut off from essential supplies of critical goods such as masks, medications, and hospital equipment.
More than this, one can evaluate the financial shape of a country by looking at its neighbors. Consider the financial shape of countries with NIIP over $20K per person in 2021 (creditor countries like Farville) and that of countries with NIIP less than -$20K per person (debtor countries like Nearville). The creditor neighborhood includes countries like Norway, Germany, and Japan that either have rich natural resources or have worked hard to increase their productivity and investment positions around the globe (or both). Though not on this list, China has one of the world’s largest NIIP’s and a positive NIIP per person. Even Iceland, a country devastated by the Financial Crisis, has recovered mightily since 2011.
The debtor neighborhood nations (Nearvilles) includes Spain, Portugal, and Greece, some of the lead debtor nations during the financial crisis. We also see the United States, with trade imbalances and therefore NIIP continuing to surge since the financial crisis.