Brad Setser explains why "dark matter" -- "the gap between the assets implied by the fact that the US receives more on its international investments than it pays on its external debt...and the United States' formal debt position" -- may not be able to sustain the US current account deficit.
Dark matter doesn't stem from particularly high reported returns on US investment abroad. It stems from unusually low returns on foreign investment in the US...
Rising debt was offset by falling US rates... The problem going forward? Simple. US rates are rising. So too are US interest payments...
The US has effectively financed some high yielding investment abroad with low-yielding US debt. But that is not the primary source of dark matter... The real source of dark matter is that a dollar of US investment abroad yields a far higher return than a dollar of foreign investment in the US...
What...might explain the difference between US profits abroad and foreign profits in the US...? Easy. Tax avoidance and transfer pricing...
That doesn't necessarily mean the US current account deficit is mismeasured... That just shifts US external revenues from the export line to the income line of the balance of payments.
The above excerpt doesn't do the post justice. Read the full post for details and numbers.
It's a complex issue and Setser's post is definitely not the final word, but at least it sheds some light on "dark matter".
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