Michael Mandel: A new perspective on global economic imbalances?

money.jpg The global economy is not easy to grasp let alone to describe in a few an concise words. Yet as we look at the discourse on the subject there seems to be a rather clear red thread. The global economy is disturbed and in imbalance! Why? Because USA is spending too much and the rest of the world is saving. When and how these global imbalances will correct themselves are difficult to say but brace yourselves, because when it does it will be rough!

The argument above seems to have been the main driver for some time in the global economy discourse, at least the one I have followed.

The Economist wrote in September

But a growing group of analysts now suggests that the “saving glut” is the result of long-term structural shifts and is likely to last for years, perhaps decades (...) If the “saving glut” really is here to stay, there are two main possibilities. The first is that America's consumers will continue to barrel along and the imbalances between America and the rest of the world will increase further. The second is that Americans themselves will start saving again, perhaps because the housing market falters or because high petrol prices begin to bite. With the rest of the world still determined to save too, that would send the global economy into a tailspin.

So are we heading for a crisis in which the only plausible outcome is worldwide recession?

One of the lucky bloggers to appear on my blogroll ;), the economics blogger Michael Mandel from Businessweek points us to a paper from the two Harvard scholars Ricardo Hausmann and Federico Sturzenegger which has quite a different view on the global imbalances such as they are described above.

See Michael Mandel's (profile link) post here for an excellent summary of the paper's points.

For the lazy ones, the basic points are ...

1. America's presumed current account deficit is actually a sligt surplus over a 25 year period; why?

2. First of all because USA's assets have been undervalued, and secondly ...  

3. ... as Michael Mandel points out: "These massive and unobserved exports of intellectual property--"dark matter"--imply that the U.S. is actually running a much smaller current account deficit than the official data shows."

4. The difference between the offcial statistics describing USA as net debtor with a whopping 2.5 trillion dollars worth of debt and USA as net creditor with a 600 billion dollar surplus is coined as "dark matter". 

One example of dark matter is therefore intellectual property where USA for sure is a net exporter and since the value of intellectual property is not shown in official statistics they do not tell the whole story.

From the paper: 

"In short, the US is a net provider of
knowledge, liquidity and insurance. As the
world became more global financially, the
increasing asset value of these services
underlies the spectacular increase in dark
matter over the last two decades."

What can we learn from this paper?

Quite a lot I suppose. First of all we learn that there is no apparent reason to cry wolf. As reported in the Economist survey cited above the global economy is allegedly heading for a tailspin but this seems far from the truth, or does it? In my opinion as a seasoned second year business and economics student :), "dark matter" such as it is coined is per definition very illusive. And as such I think it is reasonable to question whether it can account for such a big difference in the measured (actual) deficit/surplus. The more traditional "saving glut" argument migth not be entirely accurate but to say that USA has been running a stable surplus over the last 25 years is rather unrealistic; perhaps those assets are overvalued after all?

Who else are discussing this dark matter?

FT has the story here - "Once the massive financing required to keep on paying for such a widening gap dries up, there will be an ugly adjustment in the world economy."

John Quigging in this post - "Something like this must be true if it is assumed that the willingness of foreign lenders to support the trade deficit is the rational outcome of efficient markets. In this sense, the ‘dark matter’ hypothesis is very like phlogiston. No-one would believe in its existence if it were not necessary to make the theory work."

Thomas Palley in this post - "Unfortunately, there are problems with the “dark matter” thesis."

"America's outback" in this post - "But I plan to look at it in more detail and write a longer post. I have had the pleasure of meeting both economists on a number of occasions"

General Glut in this post - "I am more interested in their possible contribution to an explanation of how world cities -- London and New York especially, but many others besides -- manage, promote and sustain dramatic and increasingly unequal exchange between themselves and the rest of the world."