Daniel Gros, Director of of Centre for European Policy Studies, has two interesting papers on his site, both dealing with anomalies in the balance of payment statistics:
- Foreign Investment in the US (I): Disappearing in a black hole?
- Foreign Investment in the US (II):Being taken to the cleaners?
- One must thus conclude that the US has acted like a black hole for capital from the rest of the world: one can observe a large amount of investment flowing into the US, but after some time it disappears from the statistics (and foreign investment in the US that takes the form of FDI earns almost no return).
- The official data on reinvested earnings reported in the US balance of payments cannot be taken at face value. This much is suggested by a simple comparison between the reinvested earnings reported on US direct investment abroad and those reported by foreign direct investment in the US. The former, i.e. what US firms report for their investment abroad, has amounted to over $1,100 billion over the last 20 years (1982-2004). The latter, i.e. what foreign firms report for their investment in the US, has amounted to less than $20 billion over the same period (on average less than $1 billion per annum)! It is difficult to accept this difference at face value, particularly since there is little difference in terms of distributed earnings between US FDI abroad and foreign FDI in the US and given that there is little difference in the reported returns on portfolio equity investment.
The second piece deals with the “flow”, i.e. the income component of the balance of payments on an annual basis. The income on foreign direct investment is one component that has been favorable to the US. For this to be true would require that US firms earn a significantly higher rate of return on their foreign investments than do foreign firms on their US investments. This has been attributed by some economists to “dark matter“, a mysterious substance that makes US foreign investments worth much more than their reported value. Gros argues that rates of return in both directions are about the same, and that the discrepancy in the income component is due to the computation of the income on FDI and the ability of foreign firms to shift taxable income. The income on FDI is notmeasured directly, it is an imputed value derived from a computer model, something like the hypothetical employment numbers generated by the BLS birth-death model.
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The point of the two linked articles is that the US is more of a debtor than the official figures indicate. So what? It seems to me that the general opinion of Austrians for the past century is that the whole system of trade balances is faulty in method and based on invalid assumptions about trade, mainly mercantile/Keynesian assumptions. A Keynesian created the whole system of trade accounts. It shouldn’t matter to Austrians whether the US is a debtor or creditor.
Ultimately there is only two things a foriegn govt or person can do with American money – either spend it in the USofA or trade it for some other nations’ money. American that never returns is like postage stamp issues that are bought for collections – the USPS will never have to provide the service that the stamps represent. U.S. money circulating in Europe doesn’t have any effect on our economy except the effect on the international money exchanges and only then because it effects the cost of commodities to the American consumers of commodities.
Say the ChiComs decide to exchange U.S. dollars for gold. This would drive down the international value of U.S. money and prevent their largest customer from buying their slave labor goods. How will this help the ChiComs?
When foreign holdings of U.S. cash return to the USofA, the cash can be used by visiting foreign tourists to buy services, can be used to buy American products, can be used to buy American real estate or American companies. It can only harm us when used to buy votes and elections.
“Say the ChiComs decide to exchange U.S. dollars for gold. This would drive down the international value of U.S. money and prevent their largest customer from buying their slave labor goods. How will this help the ChiComs?”
the US economy is becomming more and more irrelevant in the world. soon, China will be the largest economy, and India soon to follow. who really needs american dollars any more?
and truth be told, the dollar is going to fall no matter what the chinese will do.
Why do you think the US passed China this year as the largest recipient of foreign direct investment? People wanting to invest in the US is what keeps the dollar at its current value, which by the way is just below the average for the past 20 years.
“When foreign holdings of U.S. cash return to the USofA, the cash can be used by visiting foreign tourists to buy services, can be used to buy American products, can be used to buy American real estate or American companies.”
In other words, when the Chinese and other foreigners decide to spend their enormous quantities of greenbacks, they will trade paper to Americans for vast quantities of goods and capital. Inflation will soar and the amount of real wealth owned by Americans will decline. It’s inevitable, given how the US has “managed” its fiat currency.
Currently, Chinese factories spend a huge amount of resources, labour, and energy producing goods that don’t go to Chinese people, but instead get exchanged in the US for green bits of paper. China has yet to see any advantage from its trade surplus, but that advantage will be struck when they spend their dollars.
Paul D,
Take it easy with this: “China has yet to see any advantage from its trade surplus…”– China has been able to further industrialize its Economy while de-industrializing the U.S.’. As well, it has acheived the driving of growing numbers of, once productive, American workers into the ever increasing employ of multi-various Government institutions. This, the previous, at the minimum.
The reason China is growing so fast is because it had been kept so far behind by Mao, and they’ve gone through a big change. They are mostly adopting things countries that were more free had for a long time. It’s a bit like being in a race on a windy day behind a big group in front of you. A lot of the hard stuff has already been done. Both China and India have serious issues they need to resolve if they want to pass up the Anglosphere. Could it happen? Maybe. But I’m generally pessimistic when it comes to governments deciding to do the right thing and butt out.
“China has been able to further industrialize its Economy while de-industrializing the U.S.” No one is de-industrializing the US. The American Institute for Economic Research has an excellent article in its newsletter that shows the US to have the largest manufacturing sector in the world. Our manufacturing sector alone is almost the size of China’s entire economy. And our manufacturing sector is growing. Adjusted for inflation, it has hit record levels of output in the past ten years.
Try turning the analysis completely on its’ head. Reject the hypothesis that equilibrium (or at least favorability) is when the net current account is zero and supplanting it with one where income payments equal income receipts.
From here, financial flows will be dictated by rates of return, and excess current flows will be dictated by the net financial flows. An explanation can be found in the link above. The rate of return on capital is extremely simplified, but it illustrates the point.
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