The Dark Matters of US External Balances ... The Final Blow?
There has certainly been much ado in the econsphere about the dark matter thesis as it was originally presented by Harvard scholars Ricardo Hausmann and Federico Sturzenegger. For more on the debate go see my category on 'Dark Matter' and more specifically the links in this post.
This time Menzie Chinn from Econbrowser takes a crack at the debate and delievers yet another critique to the idea that the US current account deficit in fact is closer to balance because of intangibles which are un-accounted for in the statistics. Mr. Chinn's impetus for the post is a paper from the NY Fed (yet to be published but Chinn links to an 'older and related version').
(quotes from the paper as they appear on Econbrowser - bold parts are my emphasis)
Sustained large U.S. current account deficits have led economists and policymakers to question whether future current account adjustment will occur smoothly or via a sudden and disruptive deprecation of the dollar and contraction in U.S. consumption. The stability of U.S. net external liabilities despite ongoing current account deficits cast some doubt on these concerns. So, too, do the minimal net income payments the United States makes on its large net liabilities. We show that the stability of the external position reflects sizable capital gains due to strong foreign equity markets and a weaker dollar, both of which could be reversed in the future.
We argue that intangible capital, while a relevant dimension of economic analysis, is unlikely to be substantial enough to alter the U.S. net liability position.
The paper also sets out to debunk one of the main arguments made by proponents of Dark Matter; namely that US earn a premium, not tracked by official statistics, on foreign assets (FDI) abroad compared to foreign asset placements in the US.
A closer look at the data reveals that the U.S. rate of return advantage lies entirely in FDI (Chart 5). Indeed, the rate of return on U.S. FDI assets abroad came to 8.0 percent during the first half of 2006 (top panel, solid line), vs. a rate of return on foreign FDI assets in the U.S. of just 5.1 percent (dotted line). A persistent U.S. earnings advantage is also evident in earlier years.
One point, though, should be clear. How U.S. foreign assets are valued has no implications for the income flows associated with them. If we conclude that U.S. FDI assets are "really" worth $6 trillion rather than the reported $3.5 trillion, we must also conclude that the rate of return on U.S. FDI has "really" been 4.7 percent rather than 8.0 percent. The same point holds for future FDI investments and income flows.
Finally Chinn also features a paper by Ralph Kozlow at the Bureau of Economic Analysis (BEA) which states that the original Harvard paper misinterprets the way the BEA tracks and values US holdings of assets abroad and foreign holdings in the US.
It has been our experience that inferring the market value of intangible assets from related data sets can lead to large swings and distortions.
So is this the final blow to the proponents of the dark matters of the US current account? Surely the debate will go on and it should. Because if there is one thing that is important here, it is the point made during the most heated rounds of debate by, amongst others, Michael Mandel from BW; namely that the way we track flows of goods and capital between countries must be continously revisited especially in the light of the fast chaning global economy but also in order to accurately address the value of intangibles. That point notwithstanding I do not for a minute believe that new accounting measures will make the US current account deficit go away.