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May 09, 2006
Disappearing dark matter
Brad Selzer explains why there is no "dark matter" in "RGE - Searching for the origins of dark matter." Dark matter refers to missing US assets abroad or other reasons why the US earns a positive income on its negative international investment position. As Selzer explains:
By my calculations, stripping out the difference in reinvested earnings and the effect of low US rates from the 2004 data reduces the amount of US dark matter from $3270b to around $300b. Put a bit differently, if foreign firms reinvested in the US at the same rate as US firms (reinvested earnings accounted for 4.7% of the 7.1% return on US FDI abroad in 2004 and only 1.7% of the 3.9% return on foreign direct investment in the US; my calculation effectively upped reinvested earnings to 4.7% and the overall return on foreign investment in the US to 6.9%) and if the average interest rate on US debt had been 5% rather than 2.63%, the US would have had an income deficit of around $122b in 2004, not a surplus of around $36b. And no one would be talking about dark matter.
In other words, "dark matter" is partly due to the difference in the reporting of reinvested earnings (US companies report their reinvested income abroad - which shows up as investment income in the US international accounts whereas foreign companies in the US do not necessarily report their reinvestment here - so it does not show up as the concomitant payment in the accounts) and partly due to low US interest rates.
Selzer's calculations show a residual "dark matter" of $300 billion. That is in the ball park of my estimate of $640 to $785 billion as the net value of our intangibles assets abroad (as opposed to the estimates of $3-4 trillion in "dark matter").
My explanation for why we continue to earn a net positive income on our international investments as we sink deeper in debt: volume. The size of our investments continues to grow at such a large rate that the income stream remains positive. If the size of our international portfolio had stayed constant we would have sunk into a negative payment position. We haven't yet, but there is no reason to believe that we can continue on our present trajectory. As some point the size of our debt will overwhelm the size of our investments. And then, the proverbial payment to the man with the pipe will be due.
Posted by Ken Jarboe at May 9, 2006 07:35 AM
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Comments
Interesting thought. can you be more specific about the volume issue? when do we get there? when do we reach the point where the additional debts start to impact the total position more than the investments? if you can pinpoint thata date we would know more and could start to earn some money on such bets.
Posted by: alex at May 9, 2006 06:12 PM