You Remember Dark Matter?
I do ... during the flurry in the blogosphere I reported on the topic ... a lot actually; here, here, here, here, here, and here. If you really want to dig into it I recommend my posts linked here. The exchange between Brad Setser and Michael Mandel was a treat to follow and many other pitched in around in the blogosphere. Micheal Mandel said at one point that he printed out around 200 pages about the flurry and it also at some point turned into a story in BusinessWeek and also The Economist for that matter. So where are we now then?
Well let us begin with the essential; the original paper which set all this off is written by by Harvard scholars Ricardo Hausmann and Federico Sturzenegger. In my opinion the Dark Matter debate raised three important questions of which particularly one of them is very interesting ..
1. Following the analysis of Hausmann and Sturznegger has the US really been running a steady surplus on its current account despite what the official statistics articulate? My answer here is a firm NO and I do not think that many can argue that the US current account deficit can wither away in the way proposed by the authors.
2. How resilient is the US economy? This follows obviously from the point above which implies that the US economy is almost indestructable in its capability to take on debt on the back of de-facto earnings which represent dark matter. On this one I think it is important to remember that the clout of the US economy and the status of the dollar indeed have enabled the US to run CA deficits to a degree no other country have been able to. This of course is now changing before our very eyes.
3. (this is the important one) ... Do our official statistics actually adequately measure the cross-country flows of factors in its most widest sense given the nature of the global ecomomy (i.e. a knowledge economy where intangibles become increasingly more important)? In short; how much dark matter is out there and not just from a US point of view?
So this is basically it, but all this is of course old news and the real impetus for this post is Dave Altig from Macroblog who revives the topic by referring to an article from WSJ (walled for non-subscribers). Dave also re-visits the questions I have outlined above ...
'Is it some inherently superior aspect of the US economy that drives foreigners to pay a premium for our financial assets? Or is it the agenda of, for example, the People's Bank of China, pursuing policies that are more about internal political objectives than market fundamentals?'
So are we returning to 'normal' here in the sense that even the US economy has to repay its debt; it would seem so;
Accumulated debt doesn't stop you from earning income,it just limits your ability to spend it. Nouriel Roubini puts his finger on what it all really means:
"Your standard of living is going to be reduced unless you work much harder," says Nouriel Roubini, chairman of Roubini Global Economics. "The longer we wait to adjust our consumption and reduce our debt, the bigger will be the impact on our consumption in the future."
No argument here.
The dark matter debate is really interesting to dig into because it transcends into many interesting discussions concerning the international economy and the US economy as well.