Patrick Smith seems to be based in Hong Kong, so I guess I can forgive him for thinking I work for the IIE (the Institute for International Economics). The IIE is a great place, but they , alas, don't pay my salary and they hardly need any additional publicity. Roubini Global Economics, by contrast, does pay me and it needs the publicity. I did write a book that the IIE published, but that doesn't mean I am a fellow there.
Smith's article focuses on the debate between those who believe in a new paradigm for international economics, where globalization and dark matter render old measures like the current account deficit obsolete, and stubborn traditionalists who cling to discredited measures that the market currently chooses to ignore.
Currently may be the wrong word; the dollar tumbled today. But certainly the market didn't focus on the US current account deficit last year. Smith tries to explain why:
"The markets are powering ahead, and we need to understand why," said Louis-Vincent Gave, a partner at GaveKal Research, a Hong Kong economic and market research firm. "We need to understand why the scenario of the permabears, as we call them, hasn't come to pass."
[Those think the current situation is sustainable make] two core arguments: Either the globalized economy has made traditional economic measures inaccurate, or if they are still valid, they are no longer relevant.
Either way, those favoring a new look at accepted economic thinking arrive at the same conclusion: There is no cause for concern over those quaint things called structural problems, they say.
For a time those of a bearish bent could dismiss such notions as little more than the flying of kites – a more sophisticated story in the markets but a story nonetheless. With the emergence of new theoretical backing, however, those who justify the high valuations now found in many share markets are gaining adherents.
… Two economists, Ricardo Hausmann of Harvard University and Federico Sturzenegger of Harvard and the Universidad Torcuato di Tella in Buenos Aires, say that current account statistics mismeasure a country's financial position because they are based on the geographic origin of goods – an outmoded concept.
… "When we apply our methodology," the authors wrote in a much-circulated paper, "we find that the U.S. has run no current account deficits over the last two decades and that global imbalances are relatively small and very stable."
…. If there is one theory that draws these strands neatly together into a compelling whole, it belongs to GaveKal, a small, independent research firm whose startling ideas draw large clients.
The shift from industry to services in the advanced economies, the outsourcing of manufacturing to developing nations, the real estate "revolution," as Gave calls it – all of this has yet to be fully reckoned into the data and has brought us into "Our Brave New World," which is the title of a book GaveKal published last year.
"The bears argue that the structure of the world economy today is unsustainable," Gave said during an interview.
"We argue that it's not only sustainable but that it's stronger than it was." …
GaveKal's clients include the huge U.S. hedge fund Tudor Investments and J.P. Morgan Chase.
Meanwhile, Brad Setser, a fellow at the Institute for International Economics in Washington and a former official at the U.S. Treasury Department, tries to incorporate the sum of "dark matter" into his analysis of the current account.
The last sentence caught my attention, for obvious reasons. I do try to calculate "dark matter" or more precisely changes in dark matter. It isn't hard: dark matter is just another way of measuring the US income balance.
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