Econbrowser: More on the dark matters of the US current accounts

money.jpg Now that I have begun mapping out the (blog) discussion and sources related to the dark matter thesis (see the two posts below) I would be a fool not to include, one of the recent additions to my blogroll, Econbrowser's latest contribution which contains a lot of good sources and references. Lets look at the argument presented by Econbrowser whose approach to the dark matter thesis is a bit different from what we (I) have recently seen, the quotes below are to capture the gist; go see the post for the calculations on the income series.

"I'm going to tackle this issue from another vantage point. And that is to ask oneself if the net income series that the Hausman and Sturzenegger hypothesis hinges upon will remain positive. My guess is that that outcome remains unlikely.


(...) to illustrate how close the recorded net income series is to zero, and that it could easily turn negative within the next few quarters. Using the Hausman-Sturzenegger approach, dark matter would evaporate if these trends continue."

Furthermore Econbrowser's post has a lot of good links which will allow you to dig deeper into the debate and views.

NBER working paper by Willem Buiter - Dark Matter or Cold Fusion? (critical of the DM thesis)

"Insurance premium dark matter cannot rationalise a permanent ex-post
excess return on US investment in emerging market debt financed by the
issuance of US Treasury bonds.


The argument that knowledge dark matter is embodied in US direct investment
abroad to a greater degree than in foreign direct investment in the US is not
supported by any reliable data."

The Income Implications of Rising U.S. International Liabilities - Federal Reserve Bank of New York (Balanced (?) view on the DM thesis)

"Thus far, the longer term implications of the buildup in net liabilities for U.S. net investment income have been masked
by the superior rate of return the United States earns on FDI assets and the recent drop in global interest rates.

However, continued large current account deficits are likely to push the U.S. income balance below zero in the not
too distant future.As a result, the United States will need to effect a sharper narrowing in its trade deficit to achieve any
given narrowing in its current account deficit. Such an adjustment could be challenging for the United States, which
now imports vastly more than it exports."

La Follette School of Public Affairs - Donald Nichols (critical of the DM thesis)

An example in the discussion is that of Intel, whose profits in Ireland are high relative to Intel's physical investment in plant in Ireland. These profits, it is argued are a return on an unmeasured investment of intellectual property in Ireland.


Intel's profit abroad should be thought of as a royalty on Intel's past intellectual investment in the U.S., not as profit on an unmeasured intellectual investment in Ireland. The payment should be thought of as akin to a purchased service, not as a return on an unmeasured investment.

Why Does U.S. Investment Abroad Earn Higher Returns Than Foreign Investment in the United States? - CBO paper (Balanced (?) view on the DM thesis)

"Thus, foreign holdings of U.S.assets rise relative to U.S. holdings of foreign assets in
each year that the United States runs a current-account deficit. After more than two decades of such deficits, the
United States now has a smaller dollar value of foreign assets than foreigners have of U.S. assets. That difference
(net U.S. liabilities to foreigners) reached $2.5 trillion at the end of 2004.


Despite their smaller holdings, U.S. residents have persistently earned more income on their assets abroad than
foreigners have earned on their assets in the United States.


As long as that advantageous gap in returns continues, it will help to slow the rise in the nation’s current-account deficit."

Happy reading :)!