Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

Print Print Cite Cite
Style: MLA APA Chicago Close


So, is Michael Mandel right? Did intangible income (dark matter) ride to the rescue in the first quarter, offsetting rising US debt?

by Brad Setser
June 21, 2006

As Michael Mandel has noted, the US income balance improved in the first quarter – contrary to the expectations of “pessimists” like me.  I would say “realists” – rising debt usually implies rising interest payments – who expected the US income balance to deteriorate.

The income balance is the difference between what the US earns on its overseas assets (US direct investment abroad, US lending to the world) and what it pays on its liabilities (foreign direct investment in the US, US borrowing from the world).   

Certainly the improvement in this balance in the first quarter is consistent with one of the core predictions that Hausmann and Sturzenegger made – namely that the net income that the US earns from its investment abroad  — all those intangible assets — would continue to rise, offsetting rising interest payments on growing debts.    That is exactly what happened in the first quarter.  Anualized, the first quarter data suggest that the US earned $172b more on its direct investment than it paid on foreign direct investment in the US.  That is up about $30b from the 2005 total.   A nice little gain.   Something like $600b in new dark matter, to use Hausmann and Sturzenegger’s terminology.  And US net interest payments hardly rose at all – they went from $161.6b in 2005 to $162.5b (annualized) in q1.   The paid more on its debt, but it also earned more on its lending …

On the surface, it certainly fits the dark matter story.  Michael Mandel noted (in a comment on my post) that Goldman must have earned a ton of money abroad in the first quarter … all sorts of intangible trading profits.    But is it so?     What does the more disaggregated data tell us?  Lots of charts and graphs follow.

First, the balance on FDI — which accounts for the majority of the income flows from US equity investment. 

Let’s divide FDI income into two components – dividend payments and reinvested earnings.  Dividend payments are real flows, cash that moves across borders.  Reinvested earnings are virtual flows.   Income from say US investment in Ireland is theoretically paid to the US foreign company and the parent company then uses those funds to invest in its Irish operations (something that it does, of course, for reasons utterly unrelated to Ireland’s low tax rate on corporate profits).   No money actually crosses any border.

 As Daniel Gros of CEPR has noted, there has been a consistent gap between the amount US firms reinvest in their operations abroad, and the amount foreign firms reinvest in their operations in the US.   That gap remains – though in 2006, both foreign firms and US firms seem to be reinvesting a bit more than in the past.    Q1 data has been annualized for the sake of comparison.


The absence of any US reinvestment in 2005 also stands out.  There is an obvious reason.   The Homeland Investment Act (HIA).   The impact of that act shows up even more clearly if we look at dividend payments.


The HIA had a big impact – as I argued before, the very low rate of US investment abroad mean that net FDI flows helped finance the US current account deficit in 2005.   US firms reduced their foreign assets, helping to finance the US current account deficit.  2006 is going to be a bit different.    

What else stands out?  The very low dividend payments from foreign firms operating the US.   Their dividend payments in the first quarter were unusually low – as low as they were in the recession year of 2001.    Lower actually. 

Here is the same data expressed as a percent of the market value of US FDI abroad (and foreign direct investment in the US).  2005 and 2006 stocks were estimated based on flows and an estimated valuation changes – I will update them once the new NIIP data is out.  


Certainly when it comes to dividend payments, the positive US income balance doesn’t come from exceptional returns on US investment abroad, but terrible returns on foreign investment in the US.  And q1 was particularly terrible.

Adding back in reinvested earnings gives the overall estimated return on US FDI abroad and foreign direct investment in the US.  Given how much ExxonMobil and similar companies must be earning on their foreign oil rights, given all the tax advantages of Ireland and given very robust global growth, the 8% return on US FDI doesn’t jump out at me.  Rather, what jumps out at me is the low returns on FDI in the US.   Foreign firms would have been better off holding short-term Treasuries that now pay 5% or so.    

At least if the US data is really capturing their true earnings. 


Second, debt.  It is a bit more complicated that it seems.  Remember, the US doesn’t just borrow from the world.  It also lends to the world.   Sure it borrows more than it lends.  But its lending is important to this story.  

 Why – because, as I will argue – it seems like the US lending is very short-term.  Thus US interest income from this lending changes quickly as short-term rates rise and fall.    The US has shortened the term structure of its external debt (particularly in 2002 and 2003), but its borrowing still seems to have — relative to its lending —  a longer term structure.

If you look at the disaggregated data on the composition of US borrowing and US lending, that story makes sense.   The US doesn’t own many foreign bonds.    And foreigners own a ton of US bonds.   Bank lending to and from the US basically balances out.  Ergo, the overall term structure of US lending is dominated by bank lending, and the term structure of US borrowing is driven more by the term structure of all the US bonds foreigners hold. 

US interest payments certainly have been rising rapidly recently — a point emphasized by Menzie Chinn.   But so have US receipts on its lending abroad.


US receipts have actually been rising a bit faster than US payments, once you take account of the difference in stocks.  This shows up more clearly if you look at the implied interest rates on US lending and US borrowing (doing this calculation required making some assumptions about dividend payments – since they need to be stripped out of the data.  Trust me, those assumptions don’t drive the calculation)


I tried to explain this to Christopher Swann of the Financial Times – it is what underlies my quote: 

“We did see an increase in the revenues Americans earned from foreign direct investment and overall, US investors benefited from rising interest rates because of the mix of their assets and liabilities. However, there is no reason to believe that the longer-term trend towards a weaker income balance has stabilised”. 

But in all honesty, I didn’t find a good way of explaining it.   There are too many moving parts.   Assets from lending as well as liabilities from borrowing.   Borrowing that is growing faster than lending.  A general shortening of the term structure of US external debt given the shortening of the average maturity of US treasuries.  But even taking this into account, US lending seems to have shorter-term structure than US borrowing and thus moves faster as short-term interest rates change.    

It is the sort of thing that takes charts.   

All in all, then, am I ready to throw in the towel and concede?   

Certainly not.   I wouldn’t be surprised if dividend payments on foreign FDI in the US are revised up.  They seem too low to be true.   And once short-term interest rates stabilize, the US won’t continue to get a (small) boost in its income balance from the fact that US lending “reprices” faster than US borrowing.    Rather, the data will be dominated by the lagged impact of higher US rates on overall US borrowing costs.  And the $1 trillion in new debt the US needs to take on even if the US current account deficit is only $900b. 

Remember, the US borrowing need is actually a bit bigger in non-homeland investment act years than the US current account deficit, since the US needs to borrow to finance its new equity investments abroad.  

And borrowing at 5% or 5.25% to earn 8% isn’t quite as good as borrowing at 2% to earn 7% …


  • Posted by Guest

    Intangible Capital and Economic Growth
    Carol Corrado, Charles Hulten, and Daniel Sichel

    “Published macroeconomic data traditionally exclude most intangible investment from measured GDP. This situation is beginning to change, but our estimates suggest that as much as $800 billion is still excluded from U.S. published data (as of 2003), and that this leads to the exclusion of more than $3 trillion of business intangible capital stock. To assess the importance of this omission, we add intangible capital to the standard sources-of-growth framework used by the BLS, and find that the inclusion of our list of intangible assets makes a significant difference in the observed patterns of U.S. economic growth. The rate of change of output per worker increases more rapidly when intangibles are counted as capital, and capital deepening becomes the unambiguously dominant source of growth in labor productivity. The role of multifactor productivity is correspondingly diminished, and labor’s income share is found to have decreased significantly over the last 50 years.”

    Raphael Kahan

  • Posted by Guest

    Remark (about the above): did you notice how close the numbers presented in the abstract are to the US CA deficit and NIIP ? Orwellian, would say DeLong.

    Raphael Kahan

  • Posted by CalculatedRisk

    Brad, just saw this on FT:

    Japan May trade surplus up 35.2%

    “Exports to the United States grew 20.6 percent from a year earlier …”

    Best Wishes.

  • Posted by dryfly

    I’d throw in the towel when they can accurately trace the flows, turn the intangible into tangible and show where the differences are coming from and why.

    If those measures aren’t available to them now then do some SERIOUS research – in the field so to speak and not just massage gov’t reports. They might actually have to survey & sample to get a feel for the larger picture then propose new metrics for reporting to prove their thesis. That’s how ‘real’ scientists do stuff.

    If they can do that & it all holds up… I’ll contribute to their airfare for the plane flight to Stockholm to pick up the hardware.

    But until they sweat the details I’d concede nothing. But then maybe that’s just me.

  • Posted by Guest

    “…Lenders such as Citigroup and Goldman Sachs Group Inc. are expanding their Asian leveraged-finance teams, challenging market pioneers JPMorgan Chase & Co. and Credit Suisse Group, to bankroll deals in the world’s fastest-growing leveraged-buyout market. Private-equity firms raised a record $17.6 billion to invest in Asia last year, scooping up assets ranging from China Pacific Life Insurance Co. to McDonald’s Corp.’s Japanese unit.

    Some bankers say the market may be expanding too quickly given that it is harder to get information on companies in Asia than in the U.S. and Europe, and that China doesn’t guarantee the right to seize assets if a borrower defaults.

    …Even though leveraged loans account for only about 5 percent of Asia’s lending by volume, they generate “a significant percentage” of fees because the greater risk allows lenders to demand higher returns, says Michael Tierney, Credit Suisse’s head of LBO financing for Asia. …“In Asia, information can take a long time to get, and many times comes in piecemeal form.” That increases risk for lenders, who get paid only when the bidders they back win the assets. …Bankers also have no previous transactions to compare the purchase to since it’s the first leveraged buyout in India’s software-outsourcing industry. “We almost have to be like detectives, developing the information by ourselves,” he says….”

  • Posted by Guest

    “…The dollars Americans spend on foreign products eventually end up in the hands of central banks overseas, and the central banks invest the proceeds largely in U.S. government securities. They do so in part because they want to protect themselves against financial crises ….

    Summers said, the chief explanation is not “capital flight,” in which wealthy foreigners in unstable countries park their savings in the safe haven of a U.S. bank account. Rather, it is the collective decisions of central bankers as dollars roll into their reserves from the export of goods to the U.S. market.

    But the reserves that have piled up, Summers said, are “far in excess of what is necessary” to defend against a crisis… Moreover, “no one could suppose that these are going to be high-return investments,” because the interest rates on U.S. Treasurys are about 2 percent after inflation, and for developing countries even that paltry yield would be wiped out if — as many analysts expect — the dollar declines against other currencies.

    The phenomenon is occurring not only in countries such as China that are well known for amassing vast quantities of Treasurys, but also in many poor countries that, while holding much smaller amounts than China, still hold sums that are sizable relative to their gross domestic products… A few countries, such as Singapore, have already begun using their reserves much more creatively… Summers acknowledged several problems with his proposal, such as the danger that central bankers would start gambling with their reserves by putting them into even more risky investments than stocks…”

  • Posted by Anonymous

    Clearly Goldman and the American-based hedge funds all had a spectacular first four months of the year. (May and June have been tougher…) But how much does that add up to? 20-40 Billion or so? Or can someone count better than me?

  • Posted by Guest

    Looking at this morning’s Bloomberg story ‘Refco Bank Hid $1 Billion Loss From Hedge Funds, Arafat Casino’ and thinking literally about that gambling:

    “…”Morgan Stanley, Fidelity, Goldman Sachs, JPMorgan, they’re all major investors in the gambling industry,”. …Wellington’s Winslow agrees that the industry will only continue to grow, whether the US is on board or not. “The next legs of growth will be geographies like Asia and Eastern Europe,” he says. “There’s a propensity to gamble in many of those cultures.”… “As far as I’m concerned, the biggest challenge our industry faces is our ability to manage our own growth,” says Calvin Ayre, [’s] founder and CEO…

    And whether some trading strategies are starting to look a bit more like gambling, while the trading business seems to grow faster than investment banking:

    “…As Goldman’s trading and other business picked up, its investment banking division has become less important to its bottom line. For example, in its fiscal second quarter, which ended on May 26, Goldman’s asset management unit reported its second-best quarter ever…” Goldman Sachs ranks as world’s biggest hedge fund…”

    Perhaps a contributor to more distortions and questions about stability?

  • Posted by bsetser

    CR — I guess Americans finally decided higher gas prices are here to stay in may and started buying fuel efficient cars — an area where the US is a little short on dark matter.

  • Posted by Dave Chiang

    With massive global economic imbalances, the discredited US neo-liberal trade system is completely bankrupt. Fundamentally, the US definition of Neo-liberalism free trade as a pretext to interfere with the economic sovereign authority of other nations. Of course, the US is trying to persuade China to become a belated “stakeholder” in the Pax Americana, a declining system in which China, like all developing nations, holds a pitifully small and underprivileged stake. International financial institutions led by the IMF and the World Bank are under the defacto control of the US government. Rapidly growing regional powers India and China collectively have a small voting interest in the IMF than Canada.

    Under the Clinton Administration, the US government under advise of Al Gore has used its veto power to deny World Bank financing to Chinese hydroelectric power projects on the Yangtze and Yellow rivers. Under the aegis of Treasury Secretary Robert Rubin and Larry Summers, the IMF organized hedge fund attacks on Asian economies in the 1990’s to enormously profit Wall Street insiders and speculators. Resulting from the impoverishment of millions of families in Indonesia, the resulting blowback from the Muslim community against the United States has led to the clash of civilizations across the world. A new world order based on mutual respect and tolerance is required. The old Neo-liberalism world order of exploitation and elite cronyism is over.

  • Posted by bsetser

    Dave Chiang — FYI, Soros was long indonesia (and way short thailand). The folks who cut and run in asia and caused real damage were Japanese banks (along with US and european banks, but the Japanese had the most exposure) — and they are hardly the bastions of neo-liberalism. And much as i would like to have been a part of a vast and successful conspiracy, i can assure you that the Treasury never pushed the IMF to organize hedge fund attacks on east asia.

    The Treasury was reluctant to bail out suharto unless suhorto made real changes. It wasn’t because he was muslim. It was because he was corrupt. And he ran the country as a family business (in conjunction with some local business men). Indonesia didn’t unfold the way anyone predicted, and certainly not the way anyone hoped. the violence in the sping of 98 was tragic. But you attribute motives that just weren’t there.

    Indeed, you can make a pretty good case that Rubin’s unwillingness to bail out hedge funds in Russia led directly to the end of hedge fund pressure on asia in the fall of 98. Rubin incidentally was also far more willing to regulate hedge funds (tho focused on making sure that they had enough capital/ not too much leverage) than Greenspan …

    You undermine your credibility when you post factually incorrect information about the late 90s.

    Finally, China itself decided to help finance Pax Americana. No one is forcing China to accumulate so many reserves. that is a consequence of china’s own sovereign decision. US policy is for China to allow the RMB to appreciate — i.e. the US is asking China to make changes so that it provides less financing to the US.

  • Posted by Dave Chiang

    Hi Brad,

    According to Professor Chalmers Johnson, Alan Greenspan and Robert Rubin led the Federal Reserve organized bailout of the Long Term Capital Hedge Fund in the aftermath of derivative losses from the financial attacks on the Hong Kong dollar currency peg. Thanks to the efforts of the Hong Kong monetary authority and Central Bank of China, the financial attacks that destroyed the Thailand and Indonesia economies were contained. The Wall Street Hedge Fund attacks coordinated by the office of Treasury Secretary Robert Rubin were directed to destabilize both the Hong Kong and Chinese economies. In fact, the US Hedge Fund attacks were the economic equilvalent of an act of war against a sovereign nation. The Clinton Administration attempted promote the Wall Street Neo-liberalism economic model. Vice President Al Gore called for the overthrow of the Malaysian government simply because the Malaysian President wanted to rein in Wall Street speculators. The Japanese Foreign Ministry openly condemned the Clinton Administration for its irreponsible actions.


  • Posted by bsetser

    D. Chiang — do you have any idea what my job was in 1997-98?

    “Hedge Fund attacks coordinated by the office of Robert Rubin” Really? Who says?

    The LTCM bailout was done by the FRBNY — the Treasury was more of a bystander than a participant but it certainly didn’t object. But LTCM’s losses were not primarily in asia. Tiger — yes. They got hurt when the yen carry trade collapsed. But LTCM had problems not there but in other areas. Read Dunbar and Lowenstein and then we can talk.

  • Posted by dryfly

    Finally, China itself decided to help finance Pax Americana. No one is forcing China to accumulate so many reserves. that is a consequence of china’s own sovereign decision. US policy is for China to allow the RMB to appreciate — i.e. the US is asking China to make changes so that it provides less financing to the US.

    No kidding. I shed ZERO tears for the plight of the PRC… well maybe some for the poor average working stiff but NONE for the party members. I hope they enjoy the cake they’ve baked for themselves.

    On ‘Dark Matter’… I had an interesting discussion with my cousin two days ago re DM. She works for a large US Bank – one of the biggies – and has been increasingly active in international M & A.

    She said so far this year she has had to go into work a half dozen or so times in the middle of the night to ‘close’ big deals in Asia during Asian working hours – not a big deal for her but noteworthy nontheless. This is way up from a few years ago where it was EXTEMELY rare to do something like this. These kinds of transactions invariably contribute to DM.

    But she is an ex-working class gal who has done well, sees both sides of the coin & says that while a few folks like her are making big money at this game it isn’t going to float the boats back in the old neighborhood. The numbers don’t tell the whole story.

  • Posted by Dave Chiang

    Hi Brad,

    From Robert Rubin’s deep personal involvement in the Enron and Fannie Mae scandals, the Clinton Administration was the most criminally corrupt in the history of the United States. Despite the Monica Lewisky sexual exploitation and White Water embezzlement evidence, it is simply amazing that the Clinton Administration gets a free pass on just about everything from the biased US newsmedia. Bill Clinton should have been impeached as a criminal. Period.

    As for the evidence against former Treasury Secretary Robert Rubin, I quote Professor Chalmers Johnson of the Japan Policy Research.

    ” The campaign worked in two phases. First, a major ideological barrage was launched to soften up the Asians. The Americans mobilized famous professors of economics from their universities, who never once faced a market force in their own lives, to preach the beauties of globalization; in this case meaning American economic institutions. These include total laissez faire, destruction of unions and social safety nets, staffing of regulatory agencies with retired financiers, indifference to the pay differentials between CEOs and the ordinary labor force, moving manufacturing to low-wage areas regardless of the social costs and totally unregulated flows of capital in and out of any and all economies. Ever since the Asia Pacific Economic Cooperation summit in 1993, the Americans hammered home to the Asians that they needed to open up their economies in these ways.

    Then came phase two. Once the Asian economies had begun to deregulate and were standing in the world marketplace more or less naked, the hedge funds were let loose on them. These funds are actually huge concentrations of capital owned by very wealthy Western white men, who manipulate bewilderingly complex financial instruments called derivatives. They usually locate their offices in offshore tax havens like the Cayman Islands and do everything in their power to avoid regulators or tax collectors in the so-called free market democracies. The funds easily raped Thailand, Indonesia and South Korea and then turned the shivering survivors over to the IMF, not to help the victims but to ensure that no Western bank was stuck with nonperforming loans in the devastated countries. The IMF is also the U.S. government’s chosen instrument for reforming these countries to make them look more like New York.

    The Americans suspected that all this might cause some trouble. On March 4, 1998, Adm. Joseph Prueher, then commander in chief of American military forces located in East Asia and today the U.S. ambassador-designate to China, testified before Congress that the U.S. military was on alert for early signs of instability in East Asia, including labor disputes. The Indonesian armed forces, whom Prueher’s special forces had been training for years, got rid of Suharto when it seemed necessary. The Indonesian troops killed about 1,200 shopkeepers and raped more than 150 Chinese women doing so.

    But then it all got a bit out of hand. One of the biggest hedge funds proved to be so greedy that the U.S. government had to organize a bailout for it, which brought the scheme out into the open. David Mullins, a former deputy to Federal Reserve Chairman Alan Greenspan, had gone straight to work for the Long-Term Capital Management fund after he left the Fed in 1994. Had this not been the case, it’s unlikely that the Federal Reserve Bank of New York would have arranged a $ 3.5-billion rescue package for the hedge fund. The incestuous relationship between Washington and Wall Street–what Columbia University economist Jagdish Bhagwati calls the Wall Street-Treasury complex–made East Asia’s crony capitalism look tame.

    These issues came to a head in Kuala Lumpur in November 1998. The U.S. trade representative, Charlene Barshefsky, accused the Japanese of offering $ 30 billion in aid to the stricken countries of East Asia as a way of buying their votes against further market-opening measures. The Japanese foreign ministry responded that the U.S. government was possessed by an evil spirit, a phrase painfully close to the evil empire epithet that former President Reagan used against the Soviet Union. Vice President Al Gore then gave a speech in the Malaysian capital, denouncing its head of state for trying to protect his country from international speculators and calling on the people of Malaysia to overthrow him. After that, APEC no longer had a future worth speaking of.

    The Americans do not seem to understand that their message of free trade and market economics is in serious disrepute. Wall Street itself now looks like the ancestral home of crony capitalism.”

    – Professor Chalmers Johnson


  • Posted by Steve Waldman


    Thanks for excellent visual exposition of what’s going on with the income balance, things very subtle made very clear. A teaser period on our collective ARM, plus what you’ve previously called “dark antimatter”, help to keep all of us in beer and pizza.

    I just want to see what happens when dark matter and dark antimatter come into contact. Who knows? Mining the artificats of balance-of-payments maths, maybe you’ve stumbled upon America’s path to energy independence? Or maybe just “boom”.

  • Posted by bsetser

    D. Chiang. Again, have you ever bothered to look up my bio and see where i worked from 97 to 01? I think I have a pretty good grip on what was going on in the Treasury then. Robert Rubin was a dedicated public servant up until the middle of 1999.

    Steve — thanks. the surprising thing in a sense is that the US in some sense pays on a fixed rate mortgage (and needs to take out a bigger one every year) and has used part of the proceeds to finance a ARM to the rest of the world. The ARM isn’t as big as the US fixed rate mortgage, and the fixed rate mortgage is growing while the ARM isn’t. but the ARM the US extended to the rest of the world is adjusting faster.

  • Posted by Guest

    Apologies Brad. My post that referenced gambling was not intended as a rant against risk or ‘corruption’ – or as fodder to spark one.

    DC certainly has a knack for digging up the rhetoric of various distinguished professors who may not be worthy of their titles – not to start a rant against the US education system, especially looking at this morning’s NYT story about the continuing student standoff in China. Although we can be sure that DC would also take a crack at blaming this entire situation on ‘Americans’ and a few specific US authorities, it would be interesting to hear from someone who is closer to it.

    Aren’t the Russians recovering quite well from ‘1998’? Would also appreciate some insight from those who lived through it and are still there. And haven’t ‘Americans’ been working in partnership with ethnic Russians throughout the 1990s right up to now, as they have been in Asian?

  • Posted by Dave Chiang

    Hi Brad,

    In regards to Robert Rubin’s personal character, why did Rubin pressure S&P and Moody’s Bond rating agencies into not downgrading Enron’s debt when it was clear that the company had defrauded billions of dollars in capital from investors. Perhaps it was because Citicorp was involved with an illicit Enron fraud scheme to hide billions in debt, and evade billions of dollars in federal taxes (ie. ). “Citicorp knew what Enron was doing, assisted Enron in the deceptions, and profited from their actions,” said Senator Carl Levin, chairman of the sub-committee on investigations, calling the action an “accounting sham”. Of course, since Robert Rubin was a staff member of the Clinton Administration, he naturally deserves a free pass from any criminal investigation to defraud investors of billions of dollars.


  • Posted by bsetser

    I am aware of Rubin’s actions as Treasury secretary, less so his actions at Citi. He did call Peter Fisher re: Enron. That is all I know. but when you cite arguments about things i do know that aren’t true, it makes me suspicious of your sources. There wasn’t a US treasury organized plot for hedge funds to put pressure on asia. period.

  • Posted by Guest

    Think everyone on this blog has realized that everything DC ‘quotes’ and says is grossly biased and distorted.

  • Posted by RN

    Brad – re Dave Chiang, very well said, thank you for that. Robert Rubin is a friend of mine and I hate to see comments like that made about him.

    Dave Chiang – There’s enough in reality to be upset about. You don’t need to create fantasies, pretend they’re real, and get all worked up. Use some of that anger to go after things that are real.

  • Posted by Guest

    Asia Trip Notes: Few Worries about the U.S. Current Account Deficit

    A nightmare scenario that some gloomy analysts advance is that foreign investors will soon conclude the U.S. current account deficit, which is financed by capital inflows, is not sustainable. At that point, foreign investors will significantly curtail their purchases of U.S. assets and may even start to dump them outright. The dollar will plunge, long-term interest rates will rise sharply, the stock market will become unglued and the U.S. economy will slide into a deep recession. This disconcerting scenario is feasible. But does it hold any water with real investors?

    I met with a number of institutional investors during my trip, and I asked them if concerns about the U.S. current account deficit are altering their investment decisions regarding U.S. assets. The response was a resounding “no.” Many foreign investors see few attractive alternatives to dollar assets due to the unrivaled breadth, liquidity and transparency of U.S. capital markets. In addition, rates of return on dollar assets generally are higher at present than rates in most other developed countries. That’s not to
    say that foreign investors have an insatiable demand for dollar assets. Indeed, we expect that narrowing interest rate differentials between the United States and most other countries will diminish, at least at the margin, the relative attractiveness of U.S. assets.
    The dollar will then depreciate modestly as net capital inflows top out, if not decline somewhat.

    However, the general willingness of foreign investors to tolerate the global financial imbalance, which is manifested by the gaping current account deficit in the United States and large current account deficits in most Asian countries, is important because that
    imbalance will not likely go away anytime soon. As we explained in a recent report, the United States has a current account deficit, because it saves too little relative to its investment spending. Conversely, China (and more broadly all of Asia) has a current
    account surplus, because it saves too much relative to its investment spending. We simply do not see those fundamentals changing anytime soon.

    On one side of the coin, the U.S. government is not likely to increase its savings by significantly reducing government spending and/or raising taxes. In addition, it seems unlikely that American consumers will markedly raise their savings rates in the near term. On the other side of the coin, Chinese consumers are not likely to significantly reduce their savings rates either. One reason the Chinese save so much is that there isn’t much of a social safety net in China. Until the Chinese government rebuilds the safety net, savings rates in China likely will remain very elevated. The bottom line is that the U.S. current account deficit probably will remain very large, necessitating large net capital inflows for an extended period of time.

  • Posted by Guest

    Steve Waldman – might you be able to talk a bit about how, or if, behavioral economics can increase our understanding of dark matter? (BE being your, or one of your areas of expertise, along with DeLong, Summers and Shleifer?) And/or might someone who specializes in law and economics be able to shed a bit more light on dark matter?

  • Posted by Guest

    China’s next building site: Building the nation – A strip of industrial sprawl and barren semi-wasteland that stretches for 150km (90 miles) along the northern coast is being turned into a development zone far bigger than either Shanghai’s or Shenzhen’s. The Binhai New Area, as the zone is called, is intended to help a swathe of northern China, including the capital, Beijing, and the provinces around the Bohai gulf (see map), enjoy the same kind of economic boom generated by Shenzhen in the Pearl River delta and by Shanghai in the lower reaches of the Yangtze.

    India: The SEZs Rush – The largest (in terms of size) is being set up in the state of Maharashtra near Mumbai. This is a twin SEZ project, a merger of Navi Mumbai SEZ and Maha Mumbai SEZ. The total size of this project is 12,000 hectares or 46 square miles. Phase I of the project, to be implemented by 2007, envisages an investment of US$1.1 billion. However, they will still be smaller than the major SEZs operating in China. The top three SEZs in China (i.e. Shenzhen, Xiamen and Zhuhai) cover 126, 51 and 47 square miles, respectively.

  • Posted by Dave Chiang

    To RN,

    Do you deny that Robert Rubin pressured S&P and Moody’s bond agencies into not downgrading Enron’s debt when it was clear that the company had defrauded billions of dollars in capital from investors. William Greider of the Nation magazine has written extensively about Citicorp’s Robert Rubin’s deep personal involvement with the Enron corporation (ie. ).

    On a personal note, I am always disturbed that Americans condesendingly believe that foreign lives whether in Iraq, Vietnam or Indonesia are worth much less than similar American lives. As a result of Hedge Fund speculative attacks by Wall Street institutions, thousands of ethnic Chinese were slaughtered in a genocide across Indonesia. As a matter of official record, the Clinton Administartion refused to condemn the massive human rights violations against ethnic Chinese in Indonesia. However, Vice President Al Gore did give a speech in the Malaysian capital, denouncing its head of state for trying to protect his country from international speculators and calling on the people of Malaysia to overthrow him.

    While enormously personally profitting from Wall Street hedge fund attacks on Indonesia, Robert Rubin is indirectly responsible for a crime against humanity on the Chinese people.


  • Posted by EthanJ


    Inflation must be part the reason. I pointed out a few months ago the US net investment payments have remained positive for 45 years, and that the single factor it appears most tightly correlated with the fluctuations is inflation. Sure enough, inflation was unexpectedly high in Q1. That resulted (somehow) in a slight increase in net investment income.

    “And borrowing at 5% or 5.25% to earn 8% isn’t quite as good as borrowing at 2% to earn 7% …”
    Yes, but higher interest rates and inflation will slow growth and import consumption, so you don’t need to make as much to break even.

    It’s inflation at root. My argument has been that higher US inflation is going to be the primary way that global imbalances are unwound, at least until the dollar is allowed to depreciate.

    New added bonus: because higher US inflation seems to be good for the US net invesment position (or at least is highly correlated to it), it follows that we should expect the US investment postition to IMPROVE later this year as inflation pickes up.

    And that implies that, like it or not, the US is going to succeed in printing its way out this debt hole, while laughing all the way to the bank.

  • Posted by bsetser

    D Chiang — The violence against ethnic Chinese in Indonesia was tragic. It certainly wasn’t part of any plan.

    and to best of my knowledge, the big hedge funds were either long indonesia or on the slide lines. The huge slide in the rpuiah stemmed from:

    a) indonesian firms (including some owned by the Chinese community) hedging b/c they had $ liabilities coming due and they needed dollars to protect against further falls
    b) significant capital flight, as Indonesians of all sorts, including i would assume the president’s family, shifted liquid funds out of the banks and into safe havens abroad.

    the withdrawal of Japanese banks played a role too.
    but Indonesia is all honesty wasn’t a big hedge fund target.
    Thailand was. but not indo.

    And NONE of the hedge fund activity was coordinated by the treasury.

  • Posted by Guest

    EthanJ — Could you elaborate on your view that higher US inflation = lower CA deficit ?
    It certainly goes against conventional thought, and, I believe, history.

    Raphael Kahan

    PS: “Correlation is not causation” – Alan Greenspan…

  • Posted by Dave Chiang

    Hi Brad,

    If you may recall, Nobel Prize Economist Joseph Stiglitz was fired at the World Bank at the behest of the Clinton Administration for questioning the IMF policy to destabilize the Asian Economic model. As a World Bank insider, he understood what the IMF officials were proposing to do across Asia. Why was Joseph Stiglitz fired by then Treasury Secretary Larry Summers for just questioning IMF economic policy in Indonesia? After all, Half the businesses in Indonesia were in virtual bankruptcy or close to it, and, as a result, the country could not even take advantage of the export opportunities the lower exchange rates provided.

    Unemployment soared across Indonesia, increasing as much as tenfold, and real wages plummeted–in countries with basically no safety nets. Not only was the IMF not restoring economic confidence in East Asia, it was undermining the region’s social fabric. Most importantly, why did the Clinton Administration according to Joseph Stiglitz–and the IMF–push policies that were designed to exclusively benefit Wall Street financial interests in the United States.

    Joseph Stiglitz also noted that then Secretary Treasury Robert Rubin refused a request by the Central Bank of Thailand to intervene with Wall Street Hedge Funds at the height of the Asian Economic crisis. The Monicagate sex scandal during the Clinton Administration pales in comparision to the financial crimes committed during the Asian Economic crisis.


  • Posted by OldVet

    In regard to one of the items in charts above, foreign owned US-asset dividends to overseas are low in major part due to conversion to tax deductible “service charges”, “interest payments”, “headquarter cost allocations”, “royalties”, and other forms of payment that can be deducted from US taxable income by corporations. Specialists including economists and IRS revenue agents who did transfer pricing audits during the last 10 years always had a good laugh when Treasury would publish estimates that transfer pricing might be costing US Treasury $30 billion a year. A real hoot. It’s more like $150 billion a year, in my humble but very educated opinion. You would see, – if it were possible to see what isn’t there – a similar lack of repatriation of earnings by US companies operating abroad, that was broken only due to the huge tax break offered on a one-time basis in 2005. Which you’ve pointed out well and clearly.

    Transferring intangible assets out of the US for 5 cents on the dollar is also very very common, at least in the corporate tax world. Once technology and other valuable intangibles are offshore, the new offshore “owner” can charge back royalties to the US companies who developed them, meaning more tax breaks for the US companies. As a matter of fact, dividends are not the preferred method of moving cash – they have to be declared and taxed in the sending country usually, then be received with less-than-optimal tax characteristics in the US.

    You might see a lot of “dark matter” disappear with a stricter set of tax rules and bigger set of enforcers on the job in the US. Even so, tax causation may not account for all of what you have observed, but rather only a big chunk of it. It would cause a lot of falsetto cries of anguish and outrage from America’s boardrooms, however. So the accounting is probably warped by chicanery, but I’d offer the thought that the motivation for outbound FDI is simple growth possibilities being greater outside than inside the US.

    MG’s and others’ points about the multiplier effects of key FDI being different in nature and kind to FDI into a highly developed economy like the US are also quite true, once again having spent about 10 years overseas monitoring and encouraging American FDI in non-US economies. What used to frustrate me was that the countries who needed development the most couldn’t absorb new technology and processes, due to the lack of supporting infrastructure. Today, you see many rapidly advancing and rather well-directed economies profiting handsomely and rapidly from FDI and all the intangibles, including knowhow and marketing and finance that usually accompany FDI. That applies especially in Asia and Eastern Europe, as well as in Brazil, Chile, and other places. The payoff for FDI in such economies can be huge, perhaps accounting for some of the “dark matter” effects that can’t be accounted for by global rates-of-return averages or home based accounting for implied interest rates.

    In sum short, you have entrepreneurial returns and investments in less developed economies paying off more handsomely than conservative investments in the US. No wonder US firms are eager to invest in China, Asia generally, and India.

  • Posted by Guest

    re: “No wonder US firms are eager to invest in China, Asia generally, and India”

    – adding Russia, Middle East…and taking those risks, which was my only point. Thought the WP Summers piece summed the situation up quite well.

  • Posted by Guest

    “While enormously personally profitting from Wall Street hedge fund attacks on Indonesia, Robert Rubin is indirectly responsible for a crime against humanity on the Chinese people.”

    Is there anyone else who finds such attacks not just cowardly and cracked but also totally out of place on this otherwise excellent blog?

  • Posted by bsetser

    I do. I am open to D. Chiang’s point of view on current Chinese policy. I strongly disagree with his attacks on former Secretary Rubin, and wish he would refrain from posting such material here. If he wants to debate me on these points, he can email me personally. Indonesia was an enormously complex problem, the rescue did not work out (read chapter 2 of my book) but i don’t think the debate over the reasons why is any way advanced by enormously overstated arguments about crimes against humanity

    One small irony: Kissinger (not exactly devoid of controversy for his role in Vietnam) was a big critique of Clinton/ Rubin in Indonesia. He thought the US should have bailed out suharto. My personal view is that there was no way politically (or morally) to bailout the corrupt status quo in indonesia. But everyone — i suspect rubin included — underestimated the risk that changes — real changes — would undermine confidence in indonesia. Those who had extended credit to indonesia had extended it to the status quo, which would have to give up its privileged position. Think of lending to a firm closely tied to a Suharto crony. reform implies the firm is a less good credit. So pull out. No change implies no help and a real liquidity crunch, so pull out … the story is vastly more complicated than D. Chiang lets on.

    On one point tho is very right: the turmoil in the spring of 98 was very much directed at the ethnic Chinese business community in Indonesia. That is a fact, and it needs to be recognized. As does the close ties between a small subset of the ethnic Chinese business community and Suharto and his clan.

  • Posted by bsetser

    Old vet — huge thanks for an on-topic comment and a good one. Dividends clearly are not the preferred way to move profits around. incidentally, most of the various service charges and particularly royalties that are tax-advantageous would show up as exports — just as US service exports. Same is true for say toyota USA. It might report smaller dividends and more royalty payments to Japan (a totally hypothetical example), increasing US service imports.

    One small problem with US firms FDI, even if it carries with it lots of intangibles. It doesn’t help finance the US deficit. makes the overall financing need worse, as a matter of fact. The US deficit would be a lot easier to finance if foreign firms were bringing all their intangibles to the US market, with more FDI and the like.

    Another FDI puzzle — reported US FDI in China is very low, all things considered. Far below FDI from the rest of Asia. Is that “real” or an artifact of various other conventions? my sense is that in the electronics/ computer biz, it is real. US firms outsourced assembly to local firms in Taiwan (and elsewhere) and those firms have done the big investment in China. But what of other sectors?

  • Posted by Guest

    If Dave Chiang’s posts are so wacky, why bother to refute them? Why not let him sound off as he wishes? I am sure there are plenty of other people around the world (quite knowledgable and intelligent) who think that Wall Street and the US Treasury (closely connected I believe)do terrible and reckless things to economically weak nations in the greedy pursuit of profits. I find it difficult to believe that an obviously wicked and rapacious imperialist nation like the USA is some sort of saintly economic force in the rest of the world. If we can lie our way into wars that kill hundreds of thousands of people, why would one think we can’t use our economic power to destroy the lives of many thousands more?

  • Posted by Guest

    Previous guest and anyone else who reads DC’s comments should also read: just for perspective

  • Posted by Guest

    Trying to get back on topic, re: “Another FDI puzzle… But what of other sectors?” is a question I’ve been attempting to ask, apparently not very well. Or perhaps because it is very difficult to answer.

  • Posted by Guest

    “If Dave Chiang’s posts are so wacky, why bother to refute them? Why not let him sound off as he wishes?”

    Mr. Chaing is being allowed to sound off as he wishes. We allow free speech in this country, unlike in China, where someone who publishes similar comments about the Chinese government that Mr. Chiang publishes about the US government would be jailed. On the other hand, I am also free to label his and your comments as half-baked, outdated, fully discredited Marxist cant. I agree, why bother to refute?

  • Posted by Barkley Rosser

    Chiang’s posts are only partly wacky. He is off on his charge that Rubin coordinated a hedge fund attack on Indonesia. He is not off that Stiglitz and many others criticized the policy of the IMF, backed by the US Treasury, after the crisis happened. However, brad setser is also correct that the situation was a lot more complicated than it seems on the surface, especially in Indonesia. The hard fact is that nobody knew what was going to happen, how bad the crisis would be or what would happen after it.

  • Posted by Guest

    re:”We allow free speech in this country, unlike in China, where someone who publishes similar comments about the Chinese government that Mr. Chiang publishes about the US government would be jailed”

    Exactly. And because no one else is transparent, we never get the whole story.

    We don’t even know if Chiang is Chiang.

  • Posted by Gcs

    a devil seems to be the globe’s book keeper these days

    a devil that doesn’t have use
    for the fate of america’s domestic interests

    ever heard of a set of numbers that guide you along
    till you’re in so deep
    when the ambush comes you can’t get back home in anything like
    the shape you left in ????

    are we american’s
    like the great and mighty napoleon
    on a path to moscow ????

  • Posted by Guest

    Often, I think, economists’ moral sense tends to get lost in the details of their ‘science.’ The trees they closely analyze obscure the forest. That is why Noam Chomsky is essential to understand the US’s role in the world economy, in spite of his not being a certified economist.

  • Posted by Paul

    From Mandel’s article:
    in the first quarter the U.S. earned more money on its foreign investments than foreigners earned on their investments in the U.S.

    Does he really think that that is a good thing for a country that needs a net inflow of about 2 billion dollars a day in order to keep its currency afloat??? If that were true, wouldn’t the US be at risk that foreign investors would one day come to their senses and stop investing in the US in order to obtain higher returns elsewhere? Does he actually think that companies like Ford and GM are some how wiser, better, and smarter than companies like Toyota and Honda??

    I wonder, though, how much of an investment hit foreigners are taking from their central banks buying so many dollars and investing them in low yield assets, like US treasuries.

    On a lighter note, from Mandel’s article:
    Especially since all of the pessimists, like Brad Setser

    ROFLMAO. Depends on how one looks at it. Does one have a high savings rate or is one deeply in debt? For the later, higher interest rates are a good thing. Is one in an industry like manufacturing or in an industry like real estate? For the later, a lower dollar is a good thing. Does one rent or own a house? For the latter, falling housing prices is a good thing. From my point of view, as I understand it, I think Dr. Sester is being very, very optimistic. I hope he is right.

  • Posted by Movie Guy


    Frankly, I would take a different approach with Dave Chiang’s issues regarding the Asian economic and financial crisis. For two important reasons.

    1. Set the record straight.
    2. Use the Asian financial and economic crisis as a model for outlining concerns regards U.S. debt accumulation and global financial imbalances.

    There are many issues worthy of consideration, historically and in the current era, not the least of which are the multiple roles that layers (stated for a purpose) of hedge funds play in financial markets. If you really understand and know the flow of actions by U.S.-based and other global hedge funds, you are one of the few willing to discuss such matters.

    For future reference – from my files:

    The Asian Economic Crisis: Points of View

    – Provides an excellent list of government and agency/organization sources and links on the Asian Financial Crisis.

    The Asian Monetary Crisis: Proposed Remedies
    C. Fred Bergsten
    Institute for International Economics
    Testimony before the Committee on Banking and Financial Services
    United States House of Representatives
    Washington, DC
    November 13, 1997

    PBS Commanding Heights – Up for Debate: Contagion
    Interviews with Robert Rubin (former SecTreas), Larry Summers (former SecTreas and Deputy SecTreas), Eisuke Sakakibara (former Minister of Finance for International Affairs of Japan), Stanley Fisher (former Deputy Managing Director, IMF), William McDonough (Fed Reverse Bank of NY), Laura Tyson (former Chair, U.S. National Economic Council), Moises Naim (former Minster of Industry and Trade of Venezuela), and Dr. Mahathir bin Mohamadm (Prime Minister of Malaysia)

    12 PBS reports – Asian economic crisis

    Treasury Secretary Robert E. Rubin
    Address on the Asian Financial Situation to Georgetown University Washington, D.C.
    January 21, 1998

    The United States, the International Monetary Fund and the Indonesian Financial Crisis
    John Bresnan
    Discussion Paper No.8
    Columbia University
    30 June 1998
    – An excellent background paper on the unfolding financial events in Indonesia

    Rubin Prescribes Bitter Medicine for Asia
    Washington Post
    July 2, 1998

    Moving Beyond Bilateralism? Japan and the Asian Monetary Fund
    Australia-Japan Research Centre
    Asia Pacific School of Economics and Management
    The Australian National University
    September 2002

    China, Japan, SKorea, ASEAN Makes Moves for Asian Monetary Fund
    Association of Southeast Asian States (ASEAN)
    May 6, 2005

    Is the IMF an Endangered Species in Asia?
    William Pesek Jr.
    May 8, 2005

    IMF Crisis of Credibility
    Multinational Monitor
    July/August 2005


  • Posted by DOR

    Dave Chiang,

    Would you mind pointing out which parts of Whitewater and the Monica Lewinsky cases involved the Office of the President of the United States?

    Short answer: none. See The Arkansas Project (1993-2000) for further details.

    As for the Indonesian Revolution that ousted Suharto, you can’t seriously be arguing that everything was fine before the Asian Financial Crisis, can you?

    * * *

    “We don’t even know if Chiang is Chiang.”
    Written by Guest on 2006-06-22 20:27:08

    “Guest” is challenging Dave Chiang’s authenticity? What a joke!


  • Posted by Movie Guy


    You said:

    1. “One small problem with US firms FDI, even if it carries with it lots of intangibles. It doesn’t help finance the US deficit. makes the overall financing need worse, as a matter of fact. The US deficit would be a lot easier to finance if foreign firms were bringing all their intangibles to the US market, with more FDI and the like.”

    I believe that you may want to rethink part of your statement. I would like to agree with you, but the first part of your statement isn’t accurate. First, it depends on the type of FDI project and the end use customer. Second, U.S.-based FDI in China resulting in exports to the U.S. does offer some stimulation of U.S. exports and domestic growth in productivity and employment. I could go into other considerations, but I’ll let you think about your remarks for a while.

    2. “Another FDI puzzle — reported US FDI in China is very low, all things considered. Far below FDI from the rest of Asia. Is that “real” or an artifact of various other conventions? my sense is that in the electronics/ computer biz, it is real. US firms outsourced assembly to local firms in Taiwan (and elsewhere) and those firms have done the big investment in China. But what of other sectors?”

    Good observation. Worthy of further discussion. I would bring DOR into the discussion.


  • Posted by jm

    David Chiang appears just to be relaying Chalmers Johnson material.

    From what I’ve read of Johnson’s stuff, either the world is run by a massive conspiracy of Wall St. insiders who control and manipulate everything, and are such clever meanies that they are able repeatedly to bamboozle poor, weak, feebleminded Asian government and business leaders into adopting policies harmful to their nations just by “[mobilizing] famous professors of economics from their universities, … ” — or else Chalmers Johnson is a nut.

    Even back in the days when Johnson was publicly visible only as a Japan basher, something about his writings put me off. Though I myself am always ready to bash the Japanese power elite’s policies, I somehow never felt he was a truly kindred spirit, or that his criticisms were really on the mark.

    The argument that Asian business and political leaders are easily swayed by the ideas of professors from famous universities is absurd.

  • Posted by jm

    The representation that “Al Gore then gave a speech in the Malaysian capital, denouncing its head of state for trying to protect his country from international speculators and calling on the people of Malaysia to overthrow him,” distorts both what he said and why he said it. This, too, appears to originate from Johnson, not Chiang himself.

  • Posted by HK

    Brad–I am no friend of Dave Chiang, who continues to make nonsense. But I think the US policy toward Indonesia at the time of financial crisis was wrong, completely wrong. And it is better for the US people involved in it to accept the huge mistake they made. Otherwise, they would never be trusted by any Asians including Indonesians.

  • Posted by Anonymous

    “We allow free speech in this country, unlike in China, where someone who publishes similar comments about the Chinese government that Mr. Chiang publishes about the US government would be jailed”

    This is self-righteous twaddle. Firstly, this is private property and Dr. Setser is perfectly entitled to decide who posts here. Aside from anything else this is a commercial enteprise and its reputation is hardly enhanced by allowing free reign to the type of individuals who place tin-foil hats on their heads before posting. Secondly, simply because the U.S. has very liberal laws relating to the defamation of public figures doesn’t mean they cannot be defamed. Thirdly, it is cowardly in the extreme to post wild and totally unsubstantiated attacks on public figures anonymously. Fourthly, there is the stench of vicious racism about Chiang’s posts. I will go further: at times it is rather like reading the Chinese version of Mein Kampf.

    Although an adult, Chiang behaves like an unruly child and he should be treated like one. Dr. Setser should send Chiang into a corner to allow him time to reflect on his behaviour. If Chiang persists in acting like a vile brat, he should then be unceremoniously thrown out of the room.

    Dr. Setser is that rare bird, a genuinely nice person. On the other hand, I suspect that he is too nice for his own good on occasion.

  • Posted by Anonymous

    “Fourthly, there is the stench of vicious racism about Chiang’s posts. I will go further: at times it is rather like reading the Chinese version of Mein Kampf.”

    Obviously with Americans taking the place of Jews.

  • Posted by Guest

    ‘Exactly – ‘DOR’???. You don’t know who I am, so not sure why you’ve developed such a thing about me.

    I could develop a false, or semi-false front like you and everyone else. Are you saying that establishes ‘credibility’ in your mind?

    I’m not pretending to be anyone or an authority representing any specific interest and I’m not launching personal attacks on anyone. You may also have noticed that I try more to focus on responding to text than the people who write them, as I don’t know who they are – although when certain participants represent themselves as authorities in this and that, I do look for some indication of credibility.

  • Posted by Guest

    re: “Obviously with Americans taking the place of Jews.”

    A quick review of Wikipedia’s Democide page will remind you that Jews are actually a small minority of people who have suffered that sort of atrocity. My dead relatives were farmers starved to death with millions, upwards estimates of 10s of millions, of others – in their own homes – as the ‘army’ kept coming through and confiscating all their crops. I don’t know how the members of my family got out – with absolutely nothing. They don’t talk about it. There are no records. Unlike Germany, more than 70 years later the nation that perpetrated the crime not owned up.

    So one reason ‘Chiang’ (whoever that is) may be so successful at hijacking discussion could be that so many millions have very distinct memories of consequences that can be associated with that sort of rhetoric – and that we are not out of the woods yet. Democide, xenophobia, propaganda are all alive and well.

    I do think that Brad damages his own credibility by dedicating so much time acknowledging ‘Chiang’ (whoever that is), at the expense of topics and other participants, when no one seems to know who that is, how that person is funded and where or why that person gets so much time to stalk participants on this site.

    I was running my own conference and one of the reasons I shut down was that I was being stalked by too many of these sorts of people. Whether or not they’re just losers with too much time on their hands who seek legitimacy and attention by participating in this sort of thing – depressing to see how much they get – or whether they represent something more sinister.

  • Posted by Guest

    My problem with Chomsky is that he doesn’t tell the other side of the story.

  • Posted by Guest

    Gosh – Speaking of fronts, ‘Admiral Acquisitions’ led by the investment bank Goldman Sachs has “moved closer to acquiring Associated British Ports”. Does ‘dark matter’ account for the ports and shipping sector?

  • Posted by Guest

    I think that one can only laud Prof Setser’s willingness to engage all comers on his blog. Chiang is the worst kind of kook – half the kind speaking sense, the other half paranoid nonsense – so it gets hard to distinguish between the two.

  • Posted by Guest

    If Brad wants to dedicate his time to engaging the ‘Chiangs’ at the expense of other participants, he’ll be locked into a pretty futile battle at the expense of more productive work.

  • Posted by Gcs

    need a diversion at the blog site??

    need a feller ready to take on the house

    ready to throw a low punch but take one too

    unleash chiang

    i think brad may have invented him

    either him or mighty joe or both

    they are both grace notes and sharpening stones
    here in my mind

    but i dearly love his ceaseless scrap

  • Posted by MTC

    “Guest” writes –

    “My problem with Chomsky is that he doesn’t tell the other side of the story.”

    That’s odd. My problem with Chomsky is that he doesnt’t tell HIS side of the story.

    Gcs writes regarding a Certain Individual:

    “but i dearly love his ceaseless scrap”

    Oh, Gcs–you clever dog! Even a dullard like me can see that you put one “s” too many in your phrase!

    Dr. Setser – two questions

    As regards the low rate of returns on FDI into the United States–are there not strong incentives to keep these returns low in nominal terms? I recall your post on the fate of the poor PBOC official who tried to be sensible and diversify the PBOC reserves, only to get tripped up by the requirement that he report his results to his superiors in dollars.

    Could we not have a similar situation here? Since European firms at the end of the day must report to their shareholders in euros, would not European-owned firms try to keep as many of their internal transactions within the Eurosphere as possible, even though, technically, the transactions intersected with the Dollar Zone? As for Japanese companies, the tax system (JM, please correct if I am wrong on this) still penalizes profitability, encouraging losses shifting between subsidiaries and the center.

    As regards the behavior of the interest payments, is this not the pattern predicted by Gourinchas & Rey–rising euro increasing U.S. receipts, declining dollar drying up the U.S interest income streams of European investors?

  • Posted by FR

    I wholeheartedly agree with Gcs’s last post.

    Please do not censor Dave Chiang. I think most of us are reasonable enough to separated the wheat from the chaff in Dave’s posts, even if there is 90% chaff.

    Thanks to Dave for introducing me to Chalmers Johnson, who has great merit in reminding us of certain truths that we might overlook in the Sargasso Sea of conventional wisdom.

    Johnson’s technique is to take a grain of truth and to exaggerate and develop it.

    Dave’s problem is that he takes everything that Johnson says as gospel and exaggerates and develops several steps further.

    The worst part of this is what the French call “procès d’intention”. The closest I can get to this in English is what Fritz Perls used to call mind f—ing. In economics I suppose it means supposing that unforeseen consequences were actually intentions of policy makers. Marxists often fall into this trap. Well meaning transplants from Wall Street become the objective allies of the nasty imperialists. And after the revolution, the first categary are likely to go before the firing squad not long after the second.

    What Dave doesn’t realize is that this kind of mind f—ing so infuriates some people, that they reject not only the chaff, but also the grain of truth that he is trying to get across to us. Brad has tried to point this out to no avail. Anyway, everything I’ve said here is obvious to other participants. Bandwith is cheap – why censor?

  • Posted by Dave Chiang

    American Economic policy needs to stop scapegoating foreigners

    ” The US must adopt a pro-saving policy — facing up to structural budget deficits and the pro-consumption biases of the tax code and a bubble-prone central bank; such an approach would tilt national saving to the upside — reducing the risk of increasingly contentious current-account and trade deficits.

    But the protectionists certainly haven’t run for cover. China bashing remains a real threat in Washington — underscored by misplaced perceptions of “fair value” for the bilateral exchange rate between the renminbi and the dollar. In my view, currency manipulation is a real “red herring” in this debate.

    US-China trade tensions are a microcosm of what’s wrong with globalization. America’s excess consumption is placing an enormous burden on the rest of the world. ”

    – Stephen Roach
    Morgan Stanley Chief Economist

  • Posted by Dave Chiang

    Hi Brad,

    Just one point I would like to make about Indonesia. As a sovereign independent nation, Indonesia’s domestic politics should not have been any national security concern to the Clinton Administration. Under the guise of human rights, Interference in the domestic internal affairs of Indonesia by the IMF resulted in a bloodbath that continues today. The impoverishment of millions of families across Indonesia has led to the Muslim blowback against the United States that has cumulated into a clash of civilizations. The Clinton Administration deliberately blocked efforts by the Japanese government to stabilize the political and economic situtation across Indonesia.


  • Posted by bsetser

    I’ll associate myself with Barkley’s comment:

    “Chiang’s posts are only partly wacky. He is off on his charge that Rubin coordinated a hedge fund attack on Indonesia. He is not off that Stiglitz and many others criticized the policy of the IMF, backed by the US Treasury, after the crisis happened. However, brad setser is also correct that the situation was a lot more complicated than it seems on the surface, especially in Indonesia. The hard fact is that nobody knew what was going to happen, how bad the crisis would be or what would happen after it.”

    Dave — all bailouts come with conditions. Japanese bailouts too. the US and IMF may have gotten the conditionality wrong. But the choice wasn’t a bailout with no conditions v. what Indonesia got. the choice was between no bailout and a bailout with serious conditions. indonesia was a very corrupt country. no more on this from me.

  • Posted by bsetser

    MTC — well, in q1, the euro wasn’t that strong — so the $ denominated revenues of european firms weren’t pushed down in euro terms, and the euro revenues of US firms weren’t pushed up in $ terms. and i don’t think euro/$ explains why the profits of european firms reported in the US are low in $ terms. Tis a puzzle. I suspect they do have incentives to undercount (linked to taxes), and i don’t know why there is such a big gap in reinvested earnings.

    as for Japanese firms incentives, i am not an expert, at all. but your suggestion is interesting.

  • Posted by FR

    I wrote –

    “What Dave doesn’t realize is that this kind of mind f—ing so infuriates some people, that they reject not only the chaff, but also the grain of truth that he is trying to get across to us.”

    On second thought, he probably does realize it, but enjoys watching the sparks fly.

    I also thought it might be worthwhile to extract some of the nuggets of truth explicit or implicit in Dave’s posts.

    Problems of free trade and capital movements –

    The doctrine of comparative advantage is only valid in the long term and/or at a macro – level. Meanwhile the pain is felt at the micro level and in the long run we’re all dead. The benefits accrue to those at the top and refuse to trickle down. The negative effects are magnified when governments refuse to intervene.

    There is little or no regulation of trans nat trade and investment at the international level. The US and subservient international organizations fight against any expansion of international law or cooperation, and the US even refuses to be governed by existing international law. Meanwhile, Big companies get bigger and bigger in order to compete successfully in a global economy, and national governments no longer enforce anti-trust legislation. Trans nat companies become more powerful than national governments. Thirty years ago, I heard the Vice Chairman of an international bank say to a closed gathering ” We are already more powerful than most national governments”, so I can imagine what the situation is today, even if I have not experienced it directly for some time.

    This situation actually suits many in American government, because they feel they can – or must – interfere in the internal politics of other nations. There is no need for international cooperation – we’ll enforce our law as we see it. As Dave chianf so rightly points out.

    An old problem getting worse –

    The only people capable of running the US Treasury are transfuges from Wall Street. This means they’re conditioned to think like Wall Street bankers. It’s been that way since Andrew Hamilton, maybe even before. Or you had people like Salmon P. Chase (my very distant cousin) an honest but disagreable man, who was forced to compromise himself with Jay Gould in order to finance the Civil War (and pay his own expenses). Andrew Jackson was one of the few to go against high finance and he brought on a recession.

    How can we liberate ourselves from Wall Street? Please tell us, Dave.

  • Posted by Dave Chiang

    Hi FR,

    Let’s start by dispensing with the propaganda nonsense that the Clinton Administration was ever out to altruistically help the Indonesia, Malaysian or Thai people. Every government in the world looks after only its own economic interests. Period. Under the guise of human rights, the Clinton Administration attempted to restructure Asian economies for the exclusive benefit of Wall Street financial institutions and hedge funds. Likewise, the Japanese supported the Indonesian government to protect their huge industrial investment across Southeast Asia. From a certain perspective, the Asian Economic crisis was a clash between the Japanese Industrial capitalist model versus the finance-driven Neo-liberal US capitalist model. The Bush Administration invasion of Iraq was also most certainly influenced by consideration of that nation’s massive untapped energy reserves, second in the world after Saudi Arabia.


  • Posted by EthanJ


    I did not say “higher US inflation = lower CA deficit ?”

    Rather, I argue that net international investment income (line 74 in the BEA numbers) (a) will remain stubbornly positive for reasons not fully understood, and (b) correlates most strongly with inflation.

    I suspect (a) is the result of a complex set of interrelated feedbacks that have allowed the US to always find some new way of coming out ahead, and those feedbacks arise from the unique position of the US at the center of the global economy. So the US can suck up $5 trillion in global debts over the last 30 years, at an interest rate of ZERO. Furthermore, this situation will continue into the near and medium term future – at least the next 5-10 years or more, probably much longer, barring (1) any serious global effort to directly address it, or (2) the displacement of the US as the single largest, strongest, most transparent, most flexible, and most important economic and financial actor in the global economy.

    Call it “Dark Matter” if you want, but it exists and is closely related to US inflation.

    However, I’m also not sure what your historical record shows. Higher US inflation will reduce the purchasing power of households and businesses, thus reducing consumption of imported goods. US inflation will also increase the dollar price of dollar-denominated commodities. For trading partners with floating currencies, higher US inflation will represent a real depreciation in the dollar. Most developed economies are in this category, for whom intellectual property and labor are significant costs while commodity prices are a small portion of total cost. As those currencies strengthen, US imports from those countries will decline and exports will pick up – reducing the CA deficit. For trading partners with currencies fixed to the dollar, higher US inflation will be imported as higher commodity prices (esp. energy). These countries tend to rely on cheap labor and are highly sensitive to commodity prices, meaning that the cost of their importing their goods to the US will rise, and US manufacturers will become more competitive, again reducing the CA deficit.

    Inflation will do what the currency markets are being prevented from doing: alleviating global imbalances. And, at the same time, punishing the returns of foreigners investing the US while improving the returns to US investment abroad, once more improving the US net investment position.

  • Posted by EthanJ

    More interestingly, the corrolary to (a) in my theory above is that the sum of all changes to the US net international investment position cannot cause it to become negative for any significant period to time. If you are predicting that there will be a substantial change in the nature or magnitude of US investment income this year that will cause it to be negative, I predict that equally large offsetting changes will occur to balance out.

    Note that even the brief dip into the red in Q3 last year followed immediately after the largest positive net investment income of the last two years. Indeed, Q2 2005 numbers were more than twice the average of the preceeding three quarters.

  • Posted by DOR

    Movie Guy raises and interesting – and important – point: the different nature of different types of FDI.

    Consider manufacturing vs services. In manufacturing, investments tend to be larger in capital terms (excluding financial sector capitalization requirements for the purpose of this argument, if you please) and result in – at least in the case of US FDI in the PRC – merchandise exports to the US. The deal involves a technology transfer license fee, regular royalties and components from highly similar companies around the industrial zone.

    Services sector FDI, however, is a very different animal. Imagine the Hong Kong-based lawyer or management consultant who flies up to Shanghai to advise a foreign-invested exporter. Because his firm has an office in Shanghai, there is an FDI component. But, he is “imported” from Hong Kong to do the actual work, which is billed in Hong Kong and doesn’t involve US or PRC balance of payments. Until, that is, the company decides to repatriate some profits or pay out a dividend.

    RE: how real is US FDI, there are very large numbers of PRC FDI statistics that do not accurately capture the origin of the investor. (Regulars will recall my infatuation with statistical accuracy as it fails to apply to China.)

    Take the case of a US company that invests in Taiwan 1964. Over the years, the foreign investor heavily localizes management to the point where by 1994 virtually all top management in Taiwan are locals. The invested company then decides to make an investment in China and, a decade on, becomes mainly a PRC-based company.

    Question: Who’s your daddy?

    * * *


    As someone who studied under Chalmers Johnson and who has met numerous Asian business and political leaders, I’ll say this: you’re speaking from ignorance. The fact that he isn’t your “kindered spirit” says as much about you as about Dr Johnson.

    Anonymous thinks Dave Chiang’s posts are racists? That’s rich! I don’t recall anyone named Gomez being told “You wouldn’t be allowed to say that in Nicaragua!”, do you?

    Guest, the name you post under is the default setting. No one knows whether you’re “Guest” or guest. Was that you throwing in a one-liner about Chomsky? No one can tell. In other words, you have no track record. Now do you understand?