Does the US have a current account deficit or not?

[frankie38]

I read this article and its the first time I ran across this argument. what does everyone think...read on....

Economics focus

America's dark materials
Jan 19th 2006
From The Economist print edition


The United States' current-account deficit is a figment of bad accounting. If only


Get article background

STARE at something long and hard enough, and it will begin to swim before your eyes. Economists have been scrutinising America's current-account deficit for years now, and they are no closer to agreeing on what they are looking at. Now two economists at Harvard doubt whether the deficit even exists. Ricardo Hausmann and Frederico Sturzenegger first put this claim in a working paper* released last November. Your correspondent has blinked twice since then, but the claim has not gone away. On the contrary, it is gathering moss?.

At the heart of the argument is a well-known paradox. In the mainstream view, America is now the world's biggest debtor. Thanks to its chronic trade deficits, it stood $2.5 trillion in the red at the end of 2004. And yet it still somehow manages to earn more on its foreign assets than it pays out to service its much bigger stock of debts: $36.2 billion more in 2004.

Most economists conclude that America earns a higher return on its overseas assets (eg, EuroDisney) than foreigners earn on investments in America (eg, Rockefeller Centre). They don their anoraks, immerse themselves in the data and try to work out why this might be so. Messrs Hausmann and Sturzenegger turn the question on its head. It is not the $36.2 billion of income that is the mystery, they say. The anomaly lies in the $2.5 trillion of debt. If America is still coming out ahead of foreigners, then, contrary to popular belief, it must still be a net creditor. America must have more foreign wealth than we can see.

The two authors have borrowed a name for this invisible wealth: dark matter. In theoretical physics, dark matter is the stuff in the universe that we can identify only by its gravitational pull. For the Harvard economists, dark matter is foreign wealth, the existence of which we can infer from the income it provides.

How much of it is out there? You can calculate a price for an asset from the earnings it provides. Messrs Hausmann and Sturzenegger elect to value America's net foreign assets at 20 times their annual earnings, which corresponds to a 5% rate of return. Valued at this ratio, America's national ?portfolio? of foreign assets and liabilities is really worth $724 billion, not minus $2.5 trillion. What is more, if its foreign assets are as stable as the authors say, it follows that ?the country has not been running a deficit.?

Messrs Hausmann and Sturzenegger were the first to name dark matter, but not the first to discover it. In his book, ?The United States as a Debtor Nation?, published last year, William Cline, of the Institute for International Economics, performed the same calculation, backing out the value of America's net foreign assets from the income they generate. (Instead of calling it dark matter, Mr Cline, evidently not a born marketing man, called it ?capitalised net capital income?.)

Mr Cline agrees with the dark materialists when they say there is ?something misleading about calling a country that makes money on its financial position the world's largest debtor?. But sadly he does not think Americans can stop worrying. After making $36.2 billion in 2004, America made just $4 billion on its net foreign assets in the first three quarters of 2005. If it continues on its present trajectory, it will shell out about $190 billion in 2010, Mr Cline calculates. Using Messrs Hausmann and Sturzenegger's methodology, America's net foreign assets would then amount to minus $3.8 trillion. A dark matter indeed.

Ptaking on Ptolemy

Apart from its name, the dark matter thesis appeals because of its simplicity. Philip Lane, of Trinity College, Dublin, thinks it too simple. It matters, he says, what a nation's foreign wealth is composed of. Foreigners hold a lot of American debt (bonds and bank loans), whereas America holds a lot of foreign equity, especially foreign direct investment (FDI). This has two implications. First, what America pays to foreign creditors depends a lot on interest rates, which have been unusually low in recent years. Second, the value of America's assets depends on the risks they carry. Yet Messrs Hausmann and Sturzenegger apply the same valuation ratio indiscriminately to bonds, equities, trade credits and bank loans on both sides of the balance sheet.

That said, there remains a big gap in reported profitability between American FDI and FDI in America that risk alone cannot explain. Perhaps taxes can. To dodge the revenuemen, a multinational company might report artificially high profits in a low-tax jurisdiction abroad. This tax arbitrage, Mr Lane points out, can shift money from one line of the current account to another. But it does not change the size of the deficit one jot.

To Messrs Hausmann and Sturzenegger, mainstream attempts to explain away dark matter look a bit desperate. Fond of their cosmological analogies, they liken them to the labours of medieval astronomers, trying to fit anomalous movements of the planets into their Ptolemaic model of the universe.

But the authors' thesis raises anomalies of its own. By their own account, dark matter should be stable. It stems from abiding features of the American economy, such as managerial know-how, a prized but uncounted commodity that Americans export to their subsidiaries abroad. But as Ed McKelvey, of Goldman Sachs, points out, America's exports of dark matter seem to jump up and down wildly from year to year: $351 billion in 2004, $1.2 trillion in 2003, just $172 billion in 2002. Dark matter seems to fluctuate at frequencies that are not structural, nor even cyclical. Perhaps they are best described as epicyclical.

Not all physicists regard dark matter as an elegant theoretical solution to the mysteries of the universe. Many think it is a bit of a fudge. Just a few months before the concept was introduced into economics, two theorists were hoping to dispel it from physics. Physicists, you see, expect beauty as well as truth from their theories. Economists, alas, must settle for one or the other.

 

[Genx87]

This is pretty interesting but when dealing with a deficit arent we talking govt outlays vs revenues? This seems to be dealing with US investment abroad which I would guess means private and public investment. Meaning private investment wont take a bite out of the deficit but will showup in these findings.

 

[CSMR]

Sounds crazy but interesting. I should have paid more attention in my macroeconomics course.

 

[techs]

Basically the article is not saying they have proof we don't have an account deficit. They are speculating that perhaps some unseen factors may be causing some discrepencies in certain factors. And these may influence our account balance.
Pure speculation. Not worth commenting on further.

 

[conjur]

I think this is the key portion:

First, what America pays to foreign creditors depends a lot on interest rates, which have been unusually low in recent years. Second, the value of America's assets depends on the risks they carry. Yet Messrs Hausmann and Sturzenegger apply the same valuation ratio indiscriminately to bonds, equities, trade credits and bank loans on both sides of the balance sheet.

That said, there remains a big gap in reported profitability between American FDI and FDI in America that risk alone cannot explain. Perhaps taxes can. To dodge the revenuemen, a multinational company might report artificially high profits in a low-tax jurisdiction abroad. This tax arbitrage, Mr Lane points out, can shift money from one line of the current account to another. But it does not change the size of the deficit one jot.

Sounds like the "dark matter" is some way to try and spin a positive look on things using a ridiculously simple method that doesn't make sense.

BTW, I came across a chart last night (URL at home...trying to find it) show how US outlays to foreign entities have skyrocketed in the last few years.

 

[sandorski]

The big problem with factoring in these to the account deficit is that the factors involved can change overnight. You could be doing well one day and have a catstrophe the next. That's why, IMO, trade of hard Goods or measurable Services is much more important to track and even to rely on in a strong economy. The further from those 2 things you go, the more precarious is your Economy.

 

[Hacp]

Originally posted by: frankie38
I read this article and its the first time I ran across this argument. what does everyone think...read on....

Economics focus

America's dark materials
Jan 19th 2006
From The Economist print edition


The United States' current-account deficit is a figment of bad accounting. If only


Get article background

STARE at something long and hard enough, and it will begin to swim before your eyes. Economists have been scrutinising America's current-account deficit for years now, and they are no closer to agreeing on what they are looking at. Now two economists at Harvard doubt whether the deficit even exists. Ricardo Hausmann and Frederico Sturzenegger first put this claim in a working paper* released last November. Your correspondent has blinked twice since then, but the claim has not gone away. On the contrary, it is gathering moss?.

At the heart of the argument is a well-known paradox. In the mainstream view, America is now the world's biggest debtor. Thanks to its chronic trade deficits, it stood $2.5 trillion in the red at the end of 2004. And yet it still somehow manages to earn more on its foreign assets than it pays out to service its much bigger stock of debts: $36.2 billion more in 2004.

Most economists conclude that America earns a higher return on its overseas assets (eg, EuroDisney) than foreigners earn on investments in America (eg, Rockefeller Centre). They don their anoraks, immerse themselves in the data and try to work out why this might be so. Messrs Hausmann and Sturzenegger turn the question on its head. It is not the $36.2 billion of income that is the mystery, they say. The anomaly lies in the $2.5 trillion of debt. If America is still coming out ahead of foreigners, then, contrary to popular belief, it must still be a net creditor. America must have more foreign wealth than we can see.

The two authors have borrowed a name for this invisible wealth: dark matter. In theoretical physics, dark matter is the stuff in the universe that we can identify only by its gravitational pull. For the Harvard economists, dark matter is foreign wealth, the existence of which we can infer from the income it provides.

How much of it is out there? You can calculate a price for an asset from the earnings it provides. Messrs Hausmann and Sturzenegger elect to value America's net foreign assets at 20 times their annual earnings, which corresponds to a 5% rate of return. Valued at this ratio, America's national ?portfolio? of foreign assets and liabilities is really worth $724 billion, not minus $2.5 trillion. What is more, if its foreign assets are as stable as the authors say, it follows that ?the country has not been running a deficit.?

Messrs Hausmann and Sturzenegger were the first to name dark matter, but not the first to discover it. In his book, ?The United States as a Debtor Nation?, published last year, William Cline, of the Institute for International Economics, performed the same calculation, backing out the value of America's net foreign assets from the income they generate. (Instead of calling it dark matter, Mr Cline, evidently not a born marketing man, called it ?capitalised net capital income?.)

Mr Cline agrees with the dark materialists when they say there is ?something misleading about calling a country that makes money on its financial position the world's largest debtor?. But sadly he does not think Americans can stop worrying. After making $36.2 billion in 2004, America made just $4 billion on its net foreign assets in the first three quarters of 2005. If it continues on its present trajectory, it will shell out about $190 billion in 2010, Mr Cline calculates. Using Messrs Hausmann and Sturzenegger's methodology, America's net foreign assets would then amount to minus $3.8 trillion. A dark matter indeed.

Ptaking on Ptolemy

Apart from its name, the dark matter thesis appeals because of its simplicity. Philip Lane, of Trinity College, Dublin, thinks it too simple. It matters, he says, what a nation's foreign wealth is composed of. Foreigners hold a lot of American debt (bonds and bank loans), whereas America holds a lot of foreign equity, especially foreign direct investment (FDI). This has two implications. First, what America pays to foreign creditors depends a lot on interest rates, which have been unusually low in recent years. Second, the value of America's assets depends on the risks they carry. Yet Messrs Hausmann and Sturzenegger apply the same valuation ratio indiscriminately to bonds, equities, trade credits and bank loans on both sides of the balance sheet.

That said, there remains a big gap in reported profitability between American FDI and FDI in America that risk alone cannot explain. Perhaps taxes can. To dodge the revenuemen, a multinational company might report artificially high profits in a low-tax jurisdiction abroad. This tax arbitrage, Mr Lane points out, can shift money from one line of the current account to another. But it does not change the size of the deficit one jot.

To Messrs Hausmann and Sturzenegger, mainstream attempts to explain away dark matter look a bit desperate. Fond of their cosmological analogies, they liken them to the labours of medieval astronomers, trying to fit anomalous movements of the planets into their Ptolemaic model of the universe.

But the authors' thesis raises anomalies of its own. By their own account, dark matter should be stable. It stems from abiding features of the American economy, such as managerial know-how, a prized but uncounted commodity that Americans export to their subsidiaries abroad. But as Ed McKelvey, of Goldman Sachs, points out, America's exports of dark matter seem to jump up and down wildly from year to year: $351 billion in 2004, $1.2 trillion in 2003, just $172 billion in 2002. Dark matter seems to fluctuate at frequencies that are not structural, nor even cyclical. Perhaps they are best described as epicyclical.

Not all physicists regard dark matter as an elegant theoretical solution to the mysteries of the universe. Many think it is a bit of a fudge. Just a few months before the concept was introduced into economics, two theorists were hoping to dispel it from physics. Physicists, you see, expect beauty as well as truth from their theories. Economists, alas, must settle for one or the other.

One big flaw. Were talking about the federal defecit. Trillions of dollars. Thats what the Americans are worrying about more, than the trade defecit. If the american government has to keep borrowing, then people will have to pay more taxes.

 

[aswedc]

I don't care how many assets Americans may or may not have. Can't do anything about that. The important thing is to make sure the federal government stops spending money it doesn't have.

 

[conjur]

Ah! Here it is!

http://www.epi.org/content.cfm/webfeat_econindicators_capict_20051216

December 16, 2005

One-time insurance payments for Hurricanes Katrina and Rita mask continuing decay in the U.S. current account deficit

The Bureau of Economic Analysis (BEA) announced today that the current account deficit (the broadest measure of the U.S. balance of trade in goods, services, and payments to the rest of the world) unexpectedly decreased to $783.3 billion, at an annual rate, in the third quarter of 2005, a decrease of $7.8 billion over the previous quarter. The U.S. deficit decreased to 6.2% of GDP, but this improvement in the deficit was entirely due to unexpected inflows of insurance payments and donations following Hurricanes Katrina and Rita. Without those payments, the deficit would have increased to more than $820 billion. The deficit is expected to increase in the future due to growing demand for petroleum products and consumer goods, and declining U.S. net investment income.

One of the most striking features of this report was revised data showed that net income from U.S. investments in the second quarter was negative for the first time in at least 45 years. It improved in the third quarter due to unusual variation in payments on foreign direct investment payments. However, rapidly growing payments to foreign holders of government securities will continue to exert downward pressure on net income from all U.S. investments in the future.

Net investment income declined sharply from a surplus of $51 billion at an annual rate in the third quarter of 2003 to a deficit of $0.4 billion in the second quarter of 2005 and then improved to a surplus of $8.1 billion in the third quarter. The long-run decline in net investment income is the result of sustained expansion of U.S. government payments to foreign holders of government securities, which have increased $47 billion since the third quarter of 2003, as shown in the figure below. Private payments (net), such as interest payments on corporate debt, have also increased $12 billion in this period.

Chart - US Government Payments to Foreign Holders of Government Securities - 1980-2005

Government interest payments rose from $74 billion in the third quarter of 2003 to $120 billion in the last quarter (at an annual rate). These payments are up sharply for two reasons. First, interest rates have been rising for the last two years. Second, foreign holdings of U.S. treasury securities have been growing rapidly.
The current account deficit indicates that the United States is consuming about 6% more than it is producing. It needs to import about $2.2 billion per day in foreign capital to finance this deficit. As a result, the net U.S. international investment deficit reached $2.5 trillion in 2004. Foreign central banks and other private investors held $2.1 trillion in U.S. treasury securities alone at the end of the third quarter. Foreign central banks held the sizeable majority (63%) of that government debt.

The deficit on goods and services increased $37 billion, at an annual rate. Present trends in the current account deficit keep it firmly on track to increase by at least $100 billion (15%) in 2005 over the record $668 billion deficit in 2004. The 13% decline in the real value of the dollar since February 2002, primarily against the Euro, has failed to stem the increase in the current account deficit, which has increased by two percentage points as a share of real GDP since 2002. To make matters worse, the dollar has increased 3% in value in the past year.

As long as the U.S. maintains sizeable current account deficits, net borrowing and payments to foreign investors will continue to grow. The standard of living of future generations will be depressed by the need to pay for today's heavy borrowing from abroad.

For more information about the current account deficit and the costs of foreign borrowing, see the December 2004 Issue Brief, Debt and the Dollar, by EPI economist L. Josh Bivens.

And rising interest rates will only make that burden even greater.

 

[Lemon law]

The other bottom line is that foreign investors will see Uncle Sam is hopelessly addicted to debt.
Which could happen overnight and Bush ain't helping there-----sure is a convient choke collar to pull on when Uncle Sam turns into a hated bully a wee mite out of control.

And will become horrid reality when Uncle Sam bellies up to the oil buying bar and is told in God we trust all others pay cash.-----------something similar happened with Ronald Reagan who ran up the defecit for eight years and poor old George Herbert Bush was in charge when the belt had to be tightened---twelve years of fiscal sanity followed by George 2 undoing all progress in just a few years.
The poor smuck elected President in 08 will inherit Mother Hubburd's empty cupboards.

Which is what King Louie the 15'th said------after me the deluge.

And as to those economists who don't understand why things are still working-----they clearly underestimate the power of cooked books-----and when it becomes well known------remember how fast and far Enron fell.

 

[NumbersGuy]

The original paper is here

Wish I could explain to the bank that they owe me

 

[ElFenix]

Originally posted by: Genx87
This is pretty interesting but when dealing with a deficit arent we talking govt outlays vs revenues? This seems to be dealing with US investment abroad which I would guess means private and public investment. Meaning private investment wont take a bite out of the deficit but will showup in these findings.

current account is the trade balance.

after racking up 39 hours of economics, i'm not sure that economists evaluate trade properly. it isn't built into the models to begin with. rather, trade is sort of tacked on to autarky models, and is evaluated within those same models.

of course, it could just be adam smith's invisible hand. if too much wealth is accumulated in one country, it inevitably (and cycilically) flows out, as prices rise in the wealthy country. what with the rapid mobility of capital, goods, and services around the globe, such effect must happen faster now than it has ever before.

then there is also the method of calculation. as was pointed out in the article, the discount rate or multiplier applied is absolutely critical in determining the numbers. a variation of even a few percent in the discount rate can lead to huge swings in the value of the underlying asset. (i.e. a bond with a face value of $1000 and a payout rate of 10% will jump to $2000 if the overall bond rate falls to 5%.) (of course, if the interest rate rises, the bonds will be cheaper to purchase for anyone, including the government, which could then retire the bonds, but a 10% bond has to rise to 20% to drop to half its price)

 

[glenn1]

Interesting thesis.

Sort of unrelated, but I find it amusing that so many people worry so tremendously about the current account deficit. I bet if you asked 100 people on the street they'd say the U.S. having a current account deficit was a bad thing. If instead you asked them what they thought about the U.S. having a net positive flow of foreign investment money into our country (which is the flip side of the current account deficit), they'd say that Toyota building a plant in this country was a good thing. People base their opinions on what sounds like a better adjective instead of what makes better economic sense - I'd bet dollars to donuts that 99% of people would say they'd prefer a "strong dollar" without having any clue what that actually entails.

 

[conjur]

Seems there are quite a few critics of Hausmann and Sturzenegger


http://www.tpmcafe.com/story/2006/1/2/21957/55873

December 16, 2005
Goldman Sachs Research
US Economics Analyst
Issue No: 05/50

"Dark Matter" in US International Transactions?

* Recently, Ricardo Hausmann and Federico Sturzenegger argued that the persistence of positive net investment income is prima facie evidence that the United States is not a net debtor. They claim that the balance of payments accounts overlook massive US exports of "dark matter"--in the form of knowledge, global liquidity, and insurance.
* We disagree, especially with their use of a constant P/E multiple to convert net income to net asset values, but they rightly point out that returns on US direct investment have consistently outpaced those on foreign counterparts. In recent years, lower interest rates and a falling dollar have helped as well, but with both currently moving the other way, the net income balance should deteriorate over the next year or two.


...


December 8, 2005
RGE Monitor

Emerging market bubble watch - and a word or two on dark matter

By Brad Setser

Setser is Head of Global Research and Senior Economist at Roubini Global Economics and a research associate at the Global Economic Governance Programme at University College, Oxford.

Four comments in response:

* The amount of "dark matter" on the US balance sheet is going to shrink rather rapidly. The US income balance went into deficit in the second quarter of 2005, and the income deficit (i.e. payments on US debts in excess of what the US earns on its external assets) may well reach $75b or so next year. Interest on the $800 billion in new debt the US took out in 2005 is part of the reason but also remember ...

* US interest rates were very, very, very low in 2002, 2003 and 2004 - unusually so. That had a thing or two to do with the positive US income balance during those years. From 2001 to 2003, the interest rate the US had to pay on its bank borrowing from abroad and the US interest rate that the US government had to pay on Treasuries held abroad fell substantially. That really helped to offset the rise in the US (gross) external debt associated with ongoing current account deficits. It won't help much longer. Interest rate differentials are no longer in the United States favor. Look for the US external interest bill to rise substantially in 2006 on the back of the Fed's tightening cycle.

* The same dynamics that have helped the US could also really hurt the US if they ever operated in reverse. US gross debt far exceeds US net debt. Gross US external liabilities are around 100% of US GDP. Big falls in the average cost of servicing all those liabilities have played a big role keeping net US payments down recently. If the US ever lost its ability to borrow from abroad at a very low rate (over the past few years, a falling rate), the overall impact on the US income position could be quite large. The interest bill on the United States gross debt could potentially go up by a lot. There is a big difference between say a 4% interest rate on gross debt of a 100% of GDP and a 6 or 7% interest rate on that much debt. At some point, a potentially very negative dynamic could set in. That is what worries me.

* Finally, generating new dark matter requires investing abroad, and, going forward, it is going to be hard for the US to both borrow to invest abroad and borrow to import so much more than the US exports. After all, judging from the reported return on foreign investment in the US, investing in the US is NOT the way to make a ton of money. Better to invest in Europe and try to find the secrets that generate all that dark matter for the US.


...


December 14, 2005 RGE Monitor

October Trade Data: Better try to find some more dark matter

By Brad Setser

It is pretty obvious that the US October trade deficit was quite large, even by recent American standards. Taking into account expected valuation changes (US assets in Europe are currently on the books at 1.35 dollars/ euro, but that will change when the end 2005 data is released) as well as the size of the US current account deficit, I suspect the US net external debt will approach $4 trillion/ 30% of US GDP by the end of this year - a bit faster than Bank of America seems to expect.

Large deficits are to be expected if a country produces less (at least less refined petroleum), exports less (I would assume that grain exports through the Mississippi are a bit below average) an still consumes more.

To me, the most interesting feature of the trade data is that non-petroleum imports are trending up once again. Think $144 billion in January, only $144-145 billion in August, $148 billion in September and $152.6 billion in October. Conversely, exports seem to have stalled, more or less, at around $106-$108 billion dollars. At a minimum, the pace of export growth seems to be slowing. This reverses the pattern of earlier this year, when monthly exports were heading up and monthly non-petroleum imports had stalled.

What about non-petroleum energy imports? They are not driving the trend either. Netting out imports of refined product (imports of petrol and fuel oil are up by almost $3 billion since August), imports of crude and imports of both pipeline natural gas and LNG (up about $1.5 billion since August), US goods imports still increased from $115 billion in August to $119.1 billion in October.

Call it the beginning of a trend. Or a step adjustment. But one way or another, the inventory correction that held down US imports for much of the first part of this year seems over. If you look at the real import and real export data in the BEA's report, they too seem to suggest a reversal. Real goods imports are rising again. Real goods exports seem to have stalled. (see p. 15 of the BEA release)

And I would not be surprised if the boost to US exports from a resurgent Boeing and the weak (end 2004) dollar is petering out. Don't discount the civilian aircraft sector - combine planes, parts and engines, and exports of aircraft and components are up by $8 billion so far this year. I am not sure a similar increase would be in the cards for next year even if the dollar has stayed at its end 2004 lows.


...


December 16, 2005 RGE Monitor

Is the world ready to finance a $1 trillion US current account deficit?

By Brad Setser

Judging from the capital inflow into the US in October, I guess the answer is yes. And I suspect the US may well give the world a chance to add $ 1 trillion to its dollar portfolio next year.

That may be a strange thing to argue after the US current account deficit (somewhat unexpectedly) fell in the third quarter. But the fall reflected a couple of one offs (Katrina related transfer payments, and some more dark matter) that I don't suspect will be sustained.

The third quarter current account deficit was only $195.8 billion, or $782.4 billion annualized. But the $196 b deficit reflects a $9 billion improvement in the US "transfers" deficit as European reinsurers made big payments to US insurers after Katrina and Rita. That alone cut the overall deficit by $9 billion. Add the $9 billion back in, and the overall deficit in the third quarter was about $205 billion, or $820 billion annualized.

The US also conjured up a bit of dark matter in the income balance.

Payments on US government debt held abroad rose by $2 billion, and other "private payments" rose by $7 billion. That is what one would expect. US policy rates are rising. US external debt is rising. That generally is a bad combination. But the US earned an extra $2.15 billion on its foreign direct investment abroad, and foreigners earned $4.1 billion less on their direct investment in the US. (Yep, the US continues to offer a raw deal to foreign companies operating in the US, at least judging from their reported income). Combine the two, and you get a $6.25 b fall in (net) income payments. Other US private receipts also increased by $5.6b, for reasons that elude me (interest rates outside the US were pretty low). This increase in US earnings abroad, along with the fall in payments on US FDI, allowed the income balance to improve in the third quarter.

I don't think that will last. If you take away the surge in FDI-related dark matter, the underling income balance deteriorated significantly.

 

[CSMR]

Originally posted by: Lemon law
The other bottom line is that foreign investors will see Uncle Sam is hopelessly addicted to debt.
Which could happen overnight and Bush ain't helping there-----sure is a convient choke collar to pull on when Uncle Sam turns into a hated bully a wee mite out of control.

And will become horrid reality when Uncle Sam bellies up to the oil buying bar and is told in God we trust all others pay cash.-----------something similar happened with Ronald Reagan who ran up the defecit for eight years and poor old George Herbert Bush was in charge when the belt had to be tightened---twelve years of fiscal sanity followed by George 2 undoing all progress in just a few years.
The poor smuck elected President in 08 will inherit Mother Hubburd's empty cupboards.

Which is what King Louie the 15'th said------after me the deluge.

And as to those economists who don't understand why things are still working-----they clearly underestimate the power of cooked books-----and when it becomes well known------remember how fast and far Enron fell.

You seem to have some definite predictions there. Back them up with cash and if you are right you will be very rich.

 

[zephyrprime]

Originally posted by: glenn1
Interesting thesis.

Sort of unrelated, but I find it amusing that so many people worry so tremendously about the current account deficit. I bet if you asked 100 people on the street they'd say the U.S. having a current account deficit was a bad thing. If instead you asked them what they thought about the U.S. having a net positive flow of foreign investment money into our country (which is the flip side of the current account deficit), they'd say that Toyota building a plant in this country was a good thing. People base their opinions on what sounds like a better adjective instead of what makes better economic sense - I'd bet dollars to donuts that 99% of people would say they'd prefer a "strong dollar" without having any clue what that actually entails.

If there were a net positive flow of foreign investment money into our country, that would decrease the current account deficit.

 

[3chordcharlie]

Originally posted by: zephyrprime

Originally posted by: glenn1
Interesting thesis.

Sort of unrelated, but I find it amusing that so many people worry so tremendously about the current account deficit. I bet if you asked 100 people on the street they'd say the U.S. having a current account deficit was a bad thing. If instead you asked them what they thought about the U.S. having a net positive flow of foreign investment money into our country (which is the flip side of the current account deficit), they'd say that Toyota building a plant in this country was a good thing. People base their opinions on what sounds like a better adjective instead of what makes better economic sense - I'd bet dollars to donuts that 99% of people would say they'd prefer a "strong dollar" without having any clue what that actually entails.

If there were a net positive flow of foreign investment money into our country, that would decrease the current account deficit.

That's the point he is making.

Foreign investment may actually be good for employment in America; Depending on some of the details, it could be symptomatic of a very healthy American employment situation, with less American ownership of foreign assets. This would mean more capital (and generally higher wages, as a result) in America, compared to nations with a current account surplus.

The risk is very evident in a country like Canada; when there are downturns, companies are more likely to close foreign investment sites than domestic ones, meaning employment instability as a result of economic instability can be multiplied if there is a significant 'branch plant' portion of an economy.

 

[LegendKiller]

Inflation and thus higher rates of interest are only going to cost *new* debt, since most government debt is fixed. Furthermore, a great deal of the debt issued to foreign investors is fixed, thus set at current prices.

If infl errodes the interest and also erode the dollar, we will be paying low interest on dollars worth less.

Combine this with the fact that if people started investing *more* into the us due to higher rates, we would have more money to invest elsewhere, including developing nations with higher returns.

I somewhat agree with them that the picture isn't as grim as many make it out to be.

 

[Tom]

This article is about whether we are gaining or losing, in relation to the rest of the world, right ?

not the government deficit and debt issue.

 

[LegendKiller]

It is not just about government debt but also public debt financed by foreigners. Many foreigners like fixed debt rather than floating. Fixed debt is aided by inflation (lower dollar) if you are the borrower.

 

[frankie38]

Cool. thank you.

 

[glenn1]

If there were a net positive flow of foreign investment money into our country, that would decrease the current account deficit.

Actually, the foreign investment represents a capital account surplus, the asset wouldn't decrease the current account deficit at all unless it generated additional export activity. If anything it's more likely to increase the current account deficit since the foreign company will probably periodically attempt to repatriate profits, which counts as a negative (i.e. a remittance) when calculating the current account. BTW, those worried about foreigners holding huge amounts of Treasury debt - payments on that debt count as an export, actually reducing our current account deficit.

You net out the current account and capital account to arrive at the balance of payments. Indeed in 2003 the capital account surplus more than offset the current account deficit, giving the U.S. a net positive $12B balance of payments.