I’m now off on vacation so will be dialling in less frequently….

In advance of that I wanted to share a quote I just came across from one of my heroes, James Tobin, from a paper entitled ‘Are There Reliable Adjustment Mechanisms?’, presented at a Bank of Japan conference. The paper is a sensational read by the way.

“The accumulation of external debt itself is reducing U.S. net investment income from the rest of the world, which will soon become negative”

Seems unremarkable until the year is taken account. The paper was presented in 1987!!

Stein’s Law will of course apply at some point but probably not for a while………..

Richard Iley

ps. Today’s news very interesting…as I said in earlier post, foreigners seem determined to continue to try to crack the US investment ‘nut’ despite a long history of failure

Wow (on the CIC’s stake in morgan). I was going to put up something based on my trip suggesting that such moves were unlikely, given losses on Blackstone. I thought — and still think — that the CIC will not end up being like a Middle Eastern fund. but they seem to have a similar appetite for US banks.

“My view, which as you rightly say has earlier been espoused by Ragu Rajan among others, is that this type of ‘accounting’ is based on a wholly arbitrary division of gross flows….”

I am certainly not a macro-economist, nor do I claim to follow all that Richard and Brad are saying, but if a “division” is useful, i.e., reveals unusual trends that helps us understand possible pitfalls, then it certainly is not “wholly arbitrary” and “inherently bogus.”

Maybe the flows do merely reflect a weakening of “home bias” and central banks are impartial intermediaries. My gut reaction is they are not. State directed purchases will reflect state needs and objectives, a very nice means of sterilization: two birds with one stone.

Again, I think Brad’s remark “state capitalism” hits the mark.

This seems significant. Do you agree with its accuracy? I don’t get that impression. If you agree with it, do you think it significant?
Written by Anonymous1 on 2007-12-18 16:02:07

This precisely characterises “the trade” [borrowing USDs to buy/invest in "things" elsewhere, ex-Japan] which has been the one that keeps on paying and paying and paying…

In terms of significance, one other distinguishing characteristic is that the US overseas assets are “private”, while its [the USAs] ex-mortgage (asset backed), ex-receivables (privately funded) liabilities are primarily public. And it seems that it’s the public liabilities that - at the source - continues to fuel, enable, and support aggregate demand, thus validating FDI, and until recently, goosing out-sized credit growth. A related thought also comes to mind: it is not only that the ownership of US outflow FDI assets are private, but that they’re concentrated, whereas the liabilities are inherently societal. No wonder that in a privately-funded political system, resolution is nowhere in sight. It seems that there are some mighty large domestic political potential conflicts set emerge of the likes not seen for nearly a century…

Adjustment likely would involve shifts in policies as well.

But ultimately, there would be a new equilibrium. and yes in some sense official inflows displace private flows by bidding up the price/ bringing down the yield (tho sometimes private flows front-run official flows). official inflows thus induce private outflows (I think we see this in europe). In the same way, by lowering the cost of borrowing, official inflows induce bigger deficits.

There unquestionably would be a different equilibrium with no intervention — a weaker $, different asset market prices, and a different pattern of private flows. At the end of the day, there likely would be more private inflows — whether b/c a fall in the dollar made US assets “Cheap” or US yields increased — as well as less borrowing. The question is how disruptive the shift would be.