NIIP’ing International Investment Confusion in the Bud

BY Paul Solman  February 18, 2011 at 7:45 AM EDT

Paul Solman answers questions from NewsHour viewers and web users on business and economic news most days on his Making Sen$e page. Here’s today’s query:

Making Sense

The epic e-epistle from one Jane Maier comes to an end today with her fourth and final point, and my response.

“Oh, and one more thing,” she wrote. “I think the public needs some awareness of the NIIP (net international investment position) ‘debt’. Could you explain the significance to me?”

NIIP is a country’s Net International Investment Position. That is, add up a country’s investments abroad, add up foreign investments in the country, and if the number isn’t negative, you’ve got Switzerland, Japan, China or Germany. If it’s negative, you’ve got Italy, Ireland, Greece, Spain and Portugal. Oh yeah, and the United States of America.

As to the significance of the number, the two lists would seem to suggest an answer, no? A positive NIIP is a good thing; a negative NIIP, not so good.

But wait. When a country has great growth potential, shouldn’t more money be invested there than the country could possibly be able to — or want to — invest abroad? Didn’t the United States maintain a negative NIIP throughout the 19th century as British capital financed our factories, our railroads, the development of the greatest economy in the history of the world?

Yes. And not that many years ago, if I remember right, supply-side economist Arthur “Curve” Laffer argued, in the Wall St. Journal, that the net inflow of capital to the U.S. was a sign of how stable, trustworthy and growth-worthy our economy really was. (I can’t find the article on the web. Perhaps one of you can and will post it as a comment below.)

There’s a pinch or more of truth to this argument. In a panic-prone world economy, with countries minting money from sea to shining sea, it’s not far-fetched that the United States would seem a safer space than most for the world to park its capital, mainly in the form of short term loans. The more the world lends us, all else equal, the more negative the NIIP of the U.S. becomes.

This is hardly a vote of confidence in the investment opportunities of the United States, of course, any more than the negative NIIP of Portugal or Greece is. If you borrow more than you invest, your net position will be negative. And that, in today’s developed world, seems to be the grim significance of a negative NIIP.