I have already commented extensively on Daniel Gros’ argument that the US balance of payments data seems to suggest that US firms reinvest a lot of their overseas earnings, while foreign firms reinvest next-to-nothing in their US operations. Like Dr. Gros, I suspect that in reality the US data just isn’t picking up the reinvested earnings of foreign firms operating in the US.
Indeed, a while back I argued that if you assume that foreign firms in the US reinvest as much as US firms invest abroad – and if you take away the gains from low US interest rates, the gap between what the US pays on its net debt and what Hausmann and Sturzenegger think the US should pay on its net debt disappears. In other words, the dark matter disappears.
Gros doesn’t just think that the US data understates the amount foreigners earn (and the US the pays out) on their investments in the US. He also thinks the US data understates the United States real external indebtedness. Debt that shows up in the balance of payments data consistently disappears from the net international investment position data.
The data are calculated in different ways:
The discrepancy arises for a simple reason: the current account data are based on actual flows of payments recorded in the balance of payments. By contrast, the data on the US international investment position are based on surveys of depository institutions, which year after year tend to lose sight of US assets held by foreigners, especially portfolio investment and real estate.
The fact that US debt keeps getting revised down year after year isn’t all that controversial. John Kitchen thinks this is the real “dark matter” that is helping the US.
Gros just thinks it is an error, and as result, the US has more (more) external debt than the formal data suggests. A lot more.
If the current account figures constitute a more reliable source … , it is likely that the true US net external debtor position is around $4,000bn (about 40 per cent of GDP) rather than the $2,500bn reported officially for end-2004. Taking into account the current account deficit of about $800bn for 2005 would bring the net current US debtor position to more than $4,500bn.
A trillion here, a trillion there and pretty soon you are talking about real money.
I haven’t delved carefully into these numbers. I am waiting until the latest US net international investment position data comes out. But I have been looking at some data on Russia, and it sure seems like some Russian investment that appears in the flow data is dropping out of the survey data. Conversely, though, some Chinese investment that doesn’t appear in the flow data recently showed up in the survey data. I suspect that is because the survey data – despite its flows – corrected some of the custodial bias (everything is held in London, no matter who really owns it) in the flow data.
But it is a very important issue. Perceptions matter. And the perception that the US has been running big deficits for a long time without running up its debt as fast as one would expect is one reason why more people aren’t worried about the huge future deficits that the US is facing.
Of course, comparing external debt to domestic assets like housing can also make the deficit go away as well. But I don’t think there is much analytical justification for comparing external debt to assets that don’t generate external revenues. Argentina tried to make the argument that external debt to export revenues was an outdated concept back in the 1990s ...
The fact that central banks have been willing to help the US finance its deficits at low rates helps lower the angst level as well.
We may get a better sense of how much help the US has been getting from its central bank friends tomorrow, when the TIC for April comes out, and again on Friday, when the current and capital account data for the first quarter comes out.
I am actually more interested to see if the statisticians revised up their estimate for central bank financing of the US in 2005 based on the survey data (which seemed to show more inflows from China) than in the q1 data itself. We sort of know that the q1 deficit will be roughly the size of the q4 deficit.
The trade deficit actually should be a bit smaller.But I would expect the income deficit to be a bit bigger. Indeed, I am quite interested in exactly more much bigger it turns out to be. Afterall, it sure looks like the Fed is going to keep increasing shor-term rates for a bit longer – and that, alas, will push up the interest bill on the United States external debt.