The United States became a net foreign debtor in 1985. With current account deficits every year since that net foreign indebtedness has steadily increased since, reaching a reported total of -$10.56 trillioin as of Sept. 30 this year, a substantial total.
However, while many have long predicted that this mounting net foreign indebtedness would eventually lead to the US having also having a net negative capital income flow, it has not happened. In 1985 when the US initially into net indebtedness, the US had a net surplus on capital income of about $30 billion. Rather than shrinking, that surplus has increased somewhat apparently in the subsequent 34 years. As of the second quarter of this year it appears that the annual surplus of capital income was running in the neighborhood of $100 billion.
While there are serious sources of uncertainty and noise in much of this data, it certainly seems that US-owned assets abroad are earning far higher rates of return than what foreigners are earning from their assets in the US. This has for quite a long time been labeled the "dark matter" phenomenon.
The question arises: how long can this odd situation continue?
Barkley Rosser
It use to be standard operating procedure for a multinational investing in another country -- building a plant, for example -- to borrow in that currency to finance the investment. Thus, it had both an asset and a liability on its books that offset each other. So currency swings, for example, would not have a net impact on it balance sheet. Over a few years it would depreciate the foreign asset and repay the loan so it was left with no foreign asset or liability on its books. But it still owned the plant and reported foreign earnings from it. I have long though this was a major source of the so called "dark matter" that made US foreign investment appear so strong.
ReplyDeleteBut nobody seemed to take this analysis seriously. Can you tell me how I am wrong and why this line of thought is incorrect.
It was back around 2005 or so that Ricardo Hausmann paper on "dark matter", claiming it was evidence of the superior management of U.S. MNCs. Brad Setser, an international flow-of-funds maven, tore that paper to shreds on his then blog, showing how the discrepancies was entirely due to tax arbitrage strategies by both U.S. and foreign MNCs.
ReplyDeleteBoys and girls, can you say "international financial piracy'?
Spence and JCH,
ReplyDeleteThese are certsinly part if it, but also not all of it. A substantial part is the ongoing roloe of the USD as the safe haven, so that whenever things go bad anywhere, including ironically even in the US as in 2008,Foreigners rush to hold safe but low return US assets, whereas US FDI abroad tends to be i nhgh return assets. There are apparently several othr things going on as well.
On Spencer's point, he is basically assuming US parent and foreign affiliates. But there are a lot of foreign parents with U.S. affiliates. BMV, Mercedes Benz, Adida, LVMH, Novartis, Nestle, the Japanese automobile manufacturers to name a few. JCH - your point is well taken but a more common term is transfer pricing manipulation. Brad Setser notes this a lot.
ReplyDeleteIIRC this was the pattern around 1900 and after for British firms. Rates of return were higher outside Britain. A consequence of financial hegemony, perhaps?
ReplyDeleteI am well aware of transfer pricing. There actually was a period of history where both the US and Canada reported that they were running a trade deficit with each other. US-Canadian trade has an unusually large share of infra-company trade rather than arms length trade. So transfer pricing is a major factor in that trade and was a primary reason that the data from both counties showed a trade deficit. They decided to deal with the problem by having each country using the other country''s import data as their export data.
ReplyDeleteSpencer - the amount of profit shifting via transfer pricing manipulation between the US and Canada is not that great. After all both nations have rather high corporate profits tax rates. If you read Brad Setser you might notice things like how much goes on with respect to tax havens such as Ireland and Switzerland.
ReplyDeleteFRED is an awesome source:
ReplyDeleteRatio of GNP to GDP for Ireland
https://fred.stlouisfed.org/series/GNPGDPIEA156NUPN
Ireland’s GNP is only 83% of GDP per the official statistics. I trust Spencer understands there is an entire literature on how this is in large part due to transfer pricing games. After all that Double Irish Dutch Sandwich trick allows Irish source income for U.S. multinationals to be often only 2.5%!
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