from Follow the Money

It is official: the current account deficit doesn’t stem from a boom in investment in intangible assets

March 2, 2006

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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OK, maybe not official.  But the Economist, drawing on the work of Carol Corrado, Dan Sichel and Charles Hulten, has the key chart.  Check it out

Investment - including investment in intangible assets -- is down significantly from its late 1990s peak.    The Economist writes:

Ms Corrado's, Mr Sichel's and Mr Hulten's estimates ...  suggest that intangible investment slowed sharply after 2000, the year the stockmarket bubble burst—as America's current-account deficit soared. Foreigners may have been funding intangible investment in the roaring 1990s, but not since. A more accurate measure of the information economy is certainly worth having, but it does not make America any less profligate.

Mandel's argument that the recent surge in the current account deficit reflects a surge in intangible investment, not a surge in consumption, doesn't look so hot.    His argument that it also reflects a surge in investment in residential real estate (investment in real estate now matches investment in tech at the peak of the tech boom) looks a lot better.   But I don't think even the trade deficit optimists think residential housing will generate future intangible export revenues, or create "dark matter."

Counting intangibles, investment isn't super low.   Business saving is up.   But household savings are down.    And fiscal surpluses have turned to deficits.  So national savings is down. That means that US investment - whether in tangible or intangible assets -- is increasingly financed by savings from abroad.

Boring.  Conventional.  Hard to make into an attention-grabbing cover story.  But, it seems, true. 

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