Wednesday, January 11, 2006

Upslidedown International Economics

FT.com / Lex - Dark matter: "
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Dark matter
Published: January 11 2006 02:00 | Last updated: January 11 2006 02:00

Now you see it, now you don't. Persistent current account deficits should lead to a deterioration in a country's balance of net investment income. But, despite a US current account deficit of more than 6 per cent of gross domestic product, the difference between income earned on US-owned assets abroad and income paid to foreigners on US-based assets has remained positive. Goldman Sachs calculates that financing the US deficit at current interest rates should produce a deterioration in the net investment balance of around a quarter of a percentage point of gross national product per year. Why has this not happened?

Ricardo Hausmann and Federico Sturzenegger of Harvard university offer an explanation that borrows from physics. The persistence of positive net investment income, despite years of accumulated deficits, can be explained by offsetting exports of 'dark matter'. This matter corresponds to assets, which must exist since they generate revenue, but cannot be seen or properly measured. They suggest three types of dark matter: the embedded knowledge in US assets overseas, the benefits from providing the world's reserve currency and from acting as a venture capitalist - issuing debt and purchasing riskier assets abroad.

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