Foreigners Like to Own Our Stuff! (And Other Scary Stories from The Economist)
The NIIP Crisis Is Made Up. So Is the Solution.
CAUTION: WONK LEVEL => NUCLEAR
For better or worse, The Economist helped make me who I am. I had no understanding of finance or economics when I found it, along with the FT, in my community library during high school, when I was tutoring Canada’s elite junior figure skaters. (Yes, really.) As a result, for four decades I’ve been intellectually influenced, on a weekly basis, to believe, for example, that budget deficits cause moral decay, and that free trade is the only good trade.
There’s always been an Economist tone: neatly logical, falsely omniscient. Author opinions are always presented as simple inarguable truths. And often I agree with them.
But an article this past week made me want to call in
, , , and maybe a licensed therapist. Preferably all at once.Apparently the White House wants voters to increase their savings rate to fix the capital account (no!), which The Economist says makes sense, but will not work unless… austerity (what?).
Does the White House Care About Savings?
So, the argument goes, Trump and Treasury Sec Bessent are seriously worried about America’s capital account. And they want to fix it by… asking Americans to buy fewer pencils!?
Trump :
They don’t need to have 30 dolls. They can have three.
This is presented by The Economist as some kind of thoughtful yet revolutionary fiscal commentary. It’s not. It’s just Trump doing his usual thing: Free-associating about trade deficits, inflation and doll inventories.
There is no policy.
Bessent, for his part, has said that China should increase consumption to rebalance trade. Which is far from the same thing as saying the US needs to increase savings.
Certainly Trump et al believe that reducing consumption of foreign goods would be helpful. But it’s pretty clear that the administration, in moments of greater lucidity than when talking about 200 pencils, wants Americans to buy more domestic goods: Making sweatshop labor great again”. The pencils/dolls digression is more likely to suggest that, if China imports rise (“maybe those dolls will cost a couple of bucks more”), voters should simply buy fewer things from China (“junk we don’t need”). That’s not the same as buying fewer things, period.
I love how the only direct evidence used in the article to (wait for it) show that the current administration is serious about increasing savings is a 15-year old quote from Peter Navarro when he was a Democrat. That’s grasping at straws.
But then real fun begins, when The Economist tries to get serious. It starts stating things that are true, but only in the way that saying “water is wet” is true:
Consumption and trade are linked.
This is not revolutionary thinking. What would be the follow up to something so obvious? Maybe “the sun is hot!”.
“Trump Is Right: Let’s Save More”
Then we get to the main event. It’s the kind of economic contortionism that should be accompanied by Cirque du Soleil music:
The only way to make the equation add up is if America ponies up its own capital by saving more.
Because:
This is the grain of truth to Mr Trump’s claim that trade deficits transfer wealth overseas.
Grain? Maybe. But we’re definitely not baking a loaf out of this.
Let’s talk about the Net International Investment Position (NIIP), which The Economist treats like a financial seismograph blinking red.
The NIIP is simply a sum of all investments Americans hold in foreign countries, minus the amount foreigners hold of US investments.
Yes, the chart looks scary. NIIP is falling. Red alert. Foreigners own our stuff.
Except… not really.
The Exorbitant Non-Problem
Here’s what’s actually happening:
Foreigners own a lot of Treasuries. Because Treasuries are safe.
Foreigners own a lot of US stocks. Because US stocks make money over the long haul.
The US, meanwhile, owns a lot of productive foreign assets, and a lot of productive domestic assets. Like stocks, FDI and businesses. Fewer bonds.
The US borrows, and invests domestically, because why wouldn’t you want to be in the best performing stock market? And foreigners also invest in the US. Same logic.
The NIIP falls when the stock market goes up, as it has, spectacularly. It “improves” (rises) when the dollar weakens. So, if you want to “fix” NIIP, all you need is a garden-variety market correction and a currency dip.
Which is happening, by the way. In fact, the dollar index is down 10% since the last NIIP figures. Nature is healing already. That’s $6 trillion or so we can add back to the NIIP, or a bit less than ¼ of the entire gap. Without any effort.
The Economist then worries that the net income due to Americans has fallen, from extremely high levels. It was last reported as $7 billion per quarter, down from the 2017 peak of $75 billion. Looks ugly, right? But the Economist chart crime is that they start at 2006. Before 2007, the Net Investment Income position of the US was… around where it is now. It averaged $8 billion from 1999 to 2007.
So, where’s the panic?
Austerity Isn’t Always the Answer
But The Economist can’t help itself. It needs to find a moral somewhere in the numbers, so it leaps to the usual conclusion: government debt bad. Austerity good.
And though it is impractical and undesirable to alter the consumption and savings decisions of millions of American households, there is one obvious lever to pull: cutting the enormous budget deficit of the federal government.
That is, it argues that the NIIP at -$27 trillion is unsustainable, and Americans can (but probably won’t) save more, so it’s up to the US government to borrow less.
Even though its own math shows that government debt accounts for just 13% of the US’s gross liabilities. Which means that even if the US magically repaid all of its foreign debt tomorrow, the NIIP would still be “bad,” whatever that means.
But in any event, believing that austerity is the only answer requires believing that the current NIIP is a problem that needs to be resolved. Like, today. But we’ve had a negative NIIP since the Reagan era. Why is this the red line?
The US Is a “Victim”. Of its Own Success
Here’s a radical idea: maybe foreigners, and Americans, want to buy US assets because they like them. Maybe the US stock market’s six-fold rise since the 2008 financial crisis GFC isn’t a bad thing. Maybe borrowing to fund productive investment isn’t the same as a household maxing out its credit card to buy Beanie Babies.
Don’t we want to have attractive capital markets? That keep attracting money from everywhere?
Maybe, just maybe, the NIIP isn’t a crisis. It’s a feature.
So maybe austerity isn’t the solution.
And The Economist? Still predictable. Still very sure of itself.