Dark matter revisited
It has been a while since I have reported on the flurry of the dark matters of US' current accouts presented by Harvard scholars Ricardo Hausmann and Federico Sturzenegger. For an overview of the debate go see my previous posts on the subject.
In many ways, the debate on dark matter seems to be a debate over accounting methodology for a globalized knowledge as well as the question of US economy's resilience since the dark matter argument turns a huge current account deficit into a surplus over a period of 25 years.
My return to the issue of dark matter is incited by Brad Setser from RGE who has been one of the strong voices against the dark matter and in a recent post he gives us a very thorough case against Hausmann's and Sturzenegger's argument.
In order to frame Brad's arguments we might want to recoup Hausmann's and Sturzenegger's sources of dark matter; i.e. the flows untracked by official statistics which earn US a CA surplus in stead of a deficit.
[quote from one of my previous posts]
"According to the Harvard scholars there are three factors which account for the accumulation of dark matter because they are not included in offcial statistics:
(quotes below are from the paper)
1. "The first refers to foreign direct investment (FDI). (...) The point is that in the accounting of FDI, the know-how that makes investments particularly productive is poorly accounted for."
2. "Our second source of dark matter is the unaccounted value of the liquidity services provided (i.e. exported) by the US. (...) We would say that the US has exported dark matter in the form of liquidity services and is making a 5 percent return on it. This so-called seignorage, or the unmeasured provision of liquidity services is a second source of dark matter"
3. "Finally, consider the US borrowing abroad at rate of 5% (say through a Treasury bond) and then using the proceeds to buy a portfolio of debt from emerging markets which earns ex post (even after defaults) a return of 8 percent. (...) Dark matter thus includes the selling of unaccounted insurance, which generates a premium."
"In short, the US is a net provider of knowledge, liquidity and insurance.""
In essence it is the ouline above which is the focus of Setser's argument in the post and oh boy does he get nitty gritty on us; not without a warning though.
"This is a long, data intensive kind of post – really more of a draft paper. Be forewarned. On the other hand, some of the results are kind of cool, in a balance-of-payments geek kind of way."
I have read the whole thing and it is a good read although it takes som time to digest. Brad's conclusion is important in my opinion because it suggests that the dark matter debate is, among other things, really a question of technical juggling with statistics.
"A part from making a few assumptions to fill in the 2005 data, I didn’t do anything other than move numbers around – everything sums up. Just as Hausmann and Sturzenegger came up with a different way of presenting the income balance, I put together a slightly different way of presenting the same data that Hausmann and Sturzenegger use to calculate dark matter.
Playing with the numbers though helps us understand where dark matter comes from – what part is most likely the product of bad data collection (the difference in reinvested earnings), what part comes from the fall in US rates (a big chunk) and what part reflects differences in return on US assets and US liabilities. And in turns out that if you get rid of the difference in reporting of reinvested earnings and the impact of low US dollar rates, the US isn’t the shrewd capitalist our friends in Latin America imagine."
So is this the final blow to the proponents of dark matter? Probably not, but what seems clear is that although dark matter exists it surely cannot make the US current account deficit go away.