Earlier this year, there was much ink spilled (to use an anachronistic phrase) over the issue of why the United States could continue to run an investment income surplus while we had such a large debt. The theory was advanced that there was a huge amount of intangible assets - "dark matter" - not being counted in the official statistics - a finding many disagreed with.
Well, there is a simpler answer to why we can run an investment income surplus. The answer is: we can't. As the front page of today's Wall Street Journal points out - U.S. Foreign Debt Shows Its Teeth As Rates Climb:
As interest rates rise, America's debt payments are starting to climb -- so much so that for the first time in at least 90 years, the U.S. is paying noticeably more to its foreign creditors than it receives from its investments abroad. The gap reached $2.5 billion in the second quarter of 2006. In effect, the U.S. made a quarterly debt payment of about $22 for each American household, a turnaround from the $31 in net investment income per household it received a year earlier.
The gap is still small within the context of the $13 trillion American economy. And the trend could reverse if U.S. interest rates decline. But economists say America's emergence as a net payer illustrates an important point: In years to come, a growing share of whatever prosperity the nation achieves probably will be sent abroad in the form of debt-service payments. That means Americans will have to work harder to maintain the same living standards -- or cut back sharply to pay down the debt.
"Our net international obligations are coming home to roost," says Catherine Mann, a senior fellow at the Institute for International Economics. "It's as if on our personal MasterCards we have run up large obligations and never had to make payments. You can't believe that's going to last forever."
As I showed earlier, a small change in interest rates can make a huge difference given the size of the investments relative to the debt.
Yes, our official statistics do not adequately capture our intangible assets. But our intangible assets do not constitute some mysterious dark matter that magically resolves our international financial imbalances.
Only in theatre is there deux-ex-machina.
Good posts on dark matter and the informal economy.
See Brad Setser's blog for an indepth analysis of the intereantional financial implications - RGE - The deterioration in the US income balance has just begun ….