Comments on: Voldemort’s invisibility cloak

By: A. P. Simkin

A. P. Simkin — Wed, 25 Jul 2007 06:02:42 +0000

Dr. S

I thought, perhaps incorrectly, that the intracompany interest payments/receipts in the BOP data are those that cross the border. So, a domestic interest payment/receipt would not show up in the BOP. Was I wrong?

By: bsetser

bsetser — Wed, 25 Jul 2007 05:26:46 +0000

interest on intra-company debt appears in the US BoP as income on FDI. and i don’t think that the implied interest rate on foreign holdings of us debt is much more impressive than the implied earnings on FDI. I don’t doubt the basic idea, but i am not sure it totally explains the puzzle.

Agree with macroman’s point on the impact of the HIA. Note that the US drug cos once again have huge holdings offshore that they don’t want to repatriate b/c of the tax. they still book all their profits in ireland. And i presume european drug cos also book their profits in ireland or switzerland or the like.

By: Anonymous

Anonymous — Wed, 25 Jul 2007 04:52:11 +0000

To clarify, I’m referring to FDI directionally into the U.S., and the correspondingly low levels of reported reinvested earnings.

By: Macro Man

Macro Man — Wed, 25 Jul 2007 04:32:37 +0000

The very significant currency market flows resulting from the so-called HIA in 2005 suggest that the size of retained earnings is large and that a substantial portion of it is retained in local currency.

By: Anonymous

Anonymous — Wed, 25 Jul 2007 04:30:45 +0000

A.P.S.

Completely agree on all counts. And FDI only depicts equity capitalization. Foreign firms can easily convert FDI income to debt interest by capitalizing with fat debt and thin equity. This moves related income completely out of the FDI category in the international accounts, embedding it in the interest category instead. Thats as much if not more of a factor as inflated internal transfer pricing of goods and services, in understanding the apparent FDI reinvested earnings conundrum.

By: A. P. Simkin

A. P. Simkin — Wed, 25 Jul 2007 04:07:48 +0000

Anon – It may be standard accounting practice, but the retained earnings numbers have little – or no – impact on the dollar’s exchange rate. The reported foreign earnings on investments in the USA have seemed suspect to me for a long time. How much of what they earn is either transfer priced outside the USA, or is offset by domestic borrowing resulting in a smaller net figure?

By: Anonymous

Anonymous — Wed, 25 Jul 2007 03:00:10 +0000

The US has been in surplus on net CA income.

FDI reinvested earnings = current account income = capital outflow.

Standard accounting for retained earnings (inflow = outflow).

By: A. P. Simkin

A. P. Simkin — Wed, 25 Jul 2007 00:40:25 +0000

Two things. One. Why has no one mentioned the London-based hedge funds and prop traders as another source of the bulging U.K. tic data? Two. America has been in net deficit on earnings for a few years. Remember. The data include unrepatriated earnings that are reinvested abroad as current-account income. My impression is that this is just an accounting device. The funds may not be held in dollars and don’t enter the USA, as the exact figure is shown as part of the foreign direct investment outflow.

By: Yendemort

Yendemort — Tue, 24 Jul 2007 19:16:52 +0000

Its “china” here mostly

what about Japan ? Yen at 120 looks like a precarious position for global markets ? Carry trade problems again ?

By: Anonymous ibid.

Anonymous ibid. — Tue, 24 Jul 2007 16:57:16 +0000

Brad, just a periodic note to thank you for the quality of your work and to say that it attracts many good commenters who provide terrific links.