Amer­ica, the bal­anced

Financial Mirror (Cyprus) - - FRONT PAGE -

When the United States’ cur­rent ac­count fell into deficit in 1982, the US Coun­cil of Eco­nomic Ad­vis­ers ac­cu­rately pre­dicted record deficits for years to come, owing to bud­get deficits, a low na­tional sav­ing rate, and an over­val­ued dol­lar. If the US did not ad­just, knowl­edge­able fore­cast­ers in­toned, it would go from be­ing the world’s largest cred­i­tor to its largest debtor. Many of us wor­ried that the im­bal­ances were un­sus­tain­able, and might end in a “hard land­ing” for the dol­lar if and when global in­vestors tired of hold­ing it.

The in­debt­ed­ness forecasts were cor­rect. In­deed, ev­ery year for more than three decades, the US Bureau of Eco­nomic Anal­y­sis (BEA) has re­ported a cur­rent-ac­count deficit. And yet now we must ask whether the US cur­rent-ac­count deficit is still a prob­lem.

For starters, the world’s in­vestors de­clared loud and clear in 2008 that they were not con­cerned about the sus­tain­abil­ity of US deficits. When the global fi­nan­cial cri­sis erupted, they flooded into dol­lar as­sets, even though the cri­sis orig­i­nated in the United States.

More­over, a sub­stan­tial amount of US adjustment has taken place since 1982 – for ex­am­ple, the dol­lar de­pre­ci­a­tions of 1985-1987 and 2002-2007 and the fis­cal re­trench­ments of 1992-2000 and 2009-2014. The big in­crease in do­mes­tic out­put of shale oil and gas has also helped the trade bal­ance re­cently.

As a re­sult, the US cur­rent-ac­count deficit in 2013 had nar­rowed by half in dol­lar terms from its 2006 peak, and from 5.8% of GDP to 2.4%. This is a de­cline of two-thirds when ex­pressed as a share of global out­put.

A sym­met­ric adjustment has also oc­curred in China, via real ap­pre­ci­a­tion of its cur­rency and higher prices for la­bor and land. China’s cur­rent-ac­count sur­plus peaked in 2008 at more than 10% of GDP and has since nar­rowed dra­mat­i­cally, to 1.9% last year. China’s trade adjustment in some re­spects fol­lowed that of Ja­pan, the orig­i­nal fo­cus of Amer­i­can trade anx­i­eties in the 1980s.

I pro­pose a third, more spec­u­la­tive rea­son why it may be time to stop wor­ry­ing about the US cur­rent-ac­count deficit. It is pos­si­ble that, prop­erly mea­sured, the true deficits were smaller than has been re­ported, and even that, in some years, they were not there at all.

Ev­ery year, US res­i­dents take some of what they earn in over­seas in­vest­ment in­come – in­ter­est on bonds, div­i­dends on eq­ui­ties, and repa­tri­ated prof­its on di­rect in­vest­ment – and rein­vest it then and there. For ex­am­ple, cor­po­ra­tions plow over­seas prof­its back into their op­er­a­tions, of­ten to avoid pay­ing the high US cor­po­rate in­come tax im­plied by repa­tri­at­ing those earn­ings. Tech­ni­cally, this should be recorded as a big­ger sur­plus on the in­vest­ment-in­come ac­count, matched by greater ac­qui­si­tion of as­sets over­seas. Of­ten it is counted cor­rectly. But there is rea­son to think that this is not al­ways the case.

The world has long run a sub­stan­tial deficit in in­vest­ment in­come, even though the cor­rect num­bers should sum to zero. The miss­ing in­come must be go­ing some­where.

Even for of­fi­cials as highly com­pe­tent as those at the BEA, it is im­pos­si­ble to keep track of all of the stocks and flows in the in­ter­na­tional econ­omy. Ev­ery­one knows that er­rors and omis­sions are large, es­pe­cially when it comes to fi­nan­cial trans­ac­tions. Un­der­fund­ing of sta­tis­ti­cal agen­cies ex­ac­er­bates mea­sure­ment prob­lems, but it does not cre­ate them.

Less well known, how­ever, is a par­tic­u­lar pat­tern in the re­vi­sions of the US in­ter­na­tional in­vest­ment po­si­tion. The cur­rently avail­able his­tor­i­cal statis­tics show that in ev­ery year from 1982 to 2000, the ini­tial es­ti­mate of the net in­ter­na­tional in­vest­ment po­si­tion was sub­se­quently re­vised up­ward, as statis­ti­cians found over­seas as­sets about which they pre­vi­ously had no way of know­ing. Since then, some sub­se­quent re­vi­sions have been pos­i­tive and some neg­a­tive. But, de­spite more fre­quent sur­veys of port­fo­lio hold­ings in re­cent years, cer­tain new as­set ac­qui­si­tions – for ex­am­ple, some held with for­eign custodians – still most likely go un­re­ported.

The num­bers are po­ten­tially large. The re­ported US cur­rent-ac­count deficits from 1982 to 2013, based on sub­se­quent re­vi­sions, to­tal $9.5 trln. And yet the de­te­ri­o­ra­tion in the US in­ter­na­tional in­vest­ment po­si­tion over this pe­riod was not much more than half of that amount ($5.7 trln if mea­sured rel­a­tive to the re­vised es­ti­mate for 1981).

Cer­tainly a lot of the dis­crep­ancy is at­trib­ut­able to val­u­a­tion ef­fects: since 1982, the dol­lar value of over­seas as­sets has in­creased re­peat­edly, owing to in­creases in the dol­lar value of for­eign cur­rency and in­creases in the as­sets’ for­eign-cur­rency value. But part of the dis­crep­ancy also re­flects the dis­cov­ery of miss­ing as­sets, some of which may have orig­i­nated in the rein­vest­ment of over­seas in­come.

The miss­ing cred­its also orig­i­nally could have been earned in other ways. For ex­am­ple, US multi­na­tional cor­po­ra­tions some­times over-in­voice im­port bills or un­der-re­port ex­port earn­ings to re­duce their tax obli­ga­tions. Again, this would work to over­state the recorded cur­rent-ac­count deficit.

Con­sider an (ad­mit­tedly ex­treme) il­lus­tra­tion. If true in­vest­ment in­come were dou­ble what is re­ported, the dif­fer­ence was rein­vested abroad in the years 1982-2000, and those as­sets were dis­cov­ered by 2014, that would ex­plain about half of the up­ward re­vi­sion in the US net in­ter­na­tional in­vest­ment po­si­tion.

If some­thing like this un­der-re­port­ing of rein­vested earn­ings or other bal­ance-of­pay­ments cred­its has gone on in the past, it may still be go­ing on to­day – es­pe­cially with US firms be­com­ing ag­gres­sive about ar­bi­trag­ing cor­po­rate in­come tax. And if true in­vest­ment in­come is in­deed as large as dou­ble what is re­ported, the true US cur­rent-ac­count bal­ance en­tered the black in 2009 and has been in sur­plus ever since.

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