In my earlier posting on the dark matter thesis, I argued that there is an alternative explanation for why we continue to have a positive investment income even though our overall asset position is deeply negative. That explanation has to do with the huge growth in our overall foreign asset position (to over $12 trillion) - at that same time as our debt is growing.
There is one aspect of the dark matter concept I want to elaborate on. The real issue behind the dark matter thesis is whether or not our exports of intangibles will be sufficient to offset our trade deficit. And whether the flow of embedded know-how is captured in our trade statistics.
It is clear that our accounting/statistical systems do not adequately capture intangibles. For a discussion of the company specific account issues, see the Athena Alliance paper Reporting Intangibles. For a discussion of the macro-economic issues, I would recommend a new paper by Corrado, Hulten and Sichel "Intangible Capital and Economic Growth" and an article in The Economist ("Getting a grip on prosperity") about that paper.
There are two ways we can attempt to measure the value of our intangible assets (know-how, etc) that may be missing from our trade and foreign investment statistics. The first is to calculate part of the income we receive that is based on the intangibles portion of the assets, by backing out that portion from the income generate by financial and physical assets, and then imputing the missing size of the asset base from that intangibles income flow. [This is similar to the approach Baruch Lev uses to calculate the size of any particular companies intangible asset base - for a lay version of the idea see "Accounting Gets Radical"].
The heroic assumption here is that the entire intangibles portion of the asset base is missing from the existing statistic; that it is not captured in any way, shape or form.
So, let's start with the value of US-owned foreign assets:$9.052 trillion. Of that $2.367 trillion (at current cost valuation) is direct investment (Direct Foreign Investment - DFI). The rest is portfolio (aka financial) investment. Any intangibles know-how "dark matter" that is exported is only part of DFI.
[By the way, US DFI is $3.287 trillion using market value. Through out this example we will use current cost, since that is what BEA uses for the International Investment Position and International Transactions Account.]
That direct investment earns the US an income of $233.1 billion for a return of 10.5%.
[By the way, Foreign Direct investment in the US is $1.708 trillion, which given the US a net asset (tangible and intangible) of $658 billion. So the US has a net surplus in our direct foreign investment. The debt problem is that of our portfolio investments.]
The income stream due to tangible (physical) assets is calculated by multiplying the asset base by the "average" rate of return for tangible assets (Lev uses 7%). That means an income flow from the tangible portion of our direct foreign investments abroad of $165.7 billion ($2.367 trillion time .07).
Subtracting out that portion of the income that is due to a 7% return on tangible assets (remember we are assuming that the entire DFI value is only tangibles - the intangibles are completely missing) give us the income flow that is due to a return on our intangible assets: $233.1 billon - $165.7 billion = $67.4 billion.
[I apologize for not putting this into economist-speak of elaborate formulas, but I think simply arithmetic should suffice.]
Dividing that income flow time the rate of return for intangible assets (Lev uses 10.5% - the rate of return in software and biotech) given us the value of the intangible assets missing from the DFI data. $67.4 billion divided by 10.5% = $641.4 billion.
So, using these estimates of 7% return on investment for physical assets and an intangible rate of return of 10.5%, then there is about $640 billion of "dark matter" i.e. intangibles that are not accounted for in the US-owned foreign asset base. And it does not include an estimate of the intangible asset base of foreign direct investment in the US, for which we are paying income to outside the US. So the net amount would be even smaller.
This is a far cry from the missing $4.2 trillion that has made up our capital accounts shift. And from the claimed in the dark matter thesis that "the US owns about $3.1 trillion of unaccounted net foreign assets."
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Another way of looking at the entire issue it to of estimate the capital basis for our intangible exports: our know-how that foreigners rent and pay for in the form of royalties and licensing fees (what might be called "intangible goods" since they are often embedded in some form of a transferable asset - a software programs, a licenses agreement, a patent, a copyright) and our sale of business services (which might be call "intangible services" since they are one-off uses of the know-how).
Our income from the "export" of intangibles is $213.3 billion. Based on Lev's estimate that intangible assets return 10.5%, our foreign-income earning intangible capital base within the United States is a little over $2 trillion. However, we pay for (rent) a foreign intangible capital base of over $1.2 trillion ($130.9 billion in imports of intangibles). If we consider the net intangible asset position as the mysterious "dark matter," it comes to about $785 billion.
Again, a far cry from the missing $3 trillion needed to balance our current accounts, as is claimed by the dark matter proponents.
By the way, Corrado, Hulten and Sichel estimate that the total stock of intangible assets in US businesses is an unreported $3.6 trillion. Nakamura estimated that the total value of intangible assets to be roughly $5 trillion in 1999.
So if this estimate that $2 trillion of intangible assets in the US is earning income from abroad (and thereby offsetting our trade deficit) is correct, then somewhere between two-thirds and two-fifths of our intangible asset base is already earning foreign income. That is a large percentage of our asset base to be earning foreign income. Lat us assume that 100% of that $5 trillion asset base was earning foreign income. At 10.5% return on investment, that would mean an income inflow to the US of $525 billion, rather than the current $213 billion. The additional income would be $312 billion. That income would not even cover the $340 billion in payments that flows out of the US in income foreigners make on their direct invest here. And it would not even come close to making a dent in the outflow of funds that make up our financial debt service payments (remember that other $6.5 to $7 trillion in foreign portfolio investment in the US).
Bottom line:
Yes, our statistical system may not adequately capture the value of our intangible assets - here and abroad. But the magnitude of those assets and the income we gain from them are utterly and completely swamped by the size of our foreign portfolio debt.
As long as we continue to rack up IOUs, we are headed for a painful realignment in our international accounts - regardless of claims by the theorist that "dark matter" can prevent a financial "big bang."
Our intangible assets wouldn't save us from our free spending way - no matter how hard you try to count them.
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