It's true foreign ownership of US stock has risen, but US ownership of foreign assets has also risen roughly in line. That's globalisation working in both directions. Right now there is an imbalance, but that's due entirely to the strength of the US dollar inflating the value of US assets. What's actually happening is the opposite of the currency crisis you fear.
The USA today is not even remotely comparable to Russia in the 90s. That's completely absurd. The US is attracting so much foreign investment precisely because it's economy is in a very strong position. How can consumers buying Chinese goods be a sign of strength in China, but investors buying into US companies be a sign of weakness in the US? Meanwhile US companies and investors are investing heavily abroad. That's not weakness, it's integration.
It's true foreign ownership of US stock has risen, but US ownership of foreign assets has also risen roughly in line.
Foreign holdings of US Assets, as of Q2 2021 are 43592.2 Billion[1]
US holdings of foreign assets are: 7694.6 Billion.[1]
We owe the world 43.6 Trillion, and they owe us 7.7 Trillion. That's a net debt of 35.9 trillion.
Right now there is an imbalance, but that's due entirely to the strength of the US dollar inflating the value of US assets.
If by "right now", you mean we reached that 36 Trillion of net debt through steady growth since the 1970s, then I agree with you - assuming "right now" refers to a 50 year period of systemic and growing trade deficits.
but that's due entirely to the strength of the US dollar inflating the value of US assets.
No, it's due to the rest of the world desiring to run trade surpluses against the U.S. in order to support an export led growth policy.
All of East Asia has industrialized on the back of running large export surpluses to the U.S. That's a strategic policy decision to drive the growth of manufacturing, and it is implemented by purchasing dollar denominated assets.
One side effect of these purchases is an overly strong dollar (as well as excessively low interest rates) but then that's what we had for most of the last 50 years.
It's not like the dollar is too strong as a result of some accident of the weather, and then this causes a trade deficit just out of nowhere. Golly, how did that happen?
What's actually happening is the opposite of the currency crisis you fear.
I am not saying we are in a crisis right now. The reason why a crisis happens is because the currency becomes overvalued! That's where we are right now. The crisis is the future downward adjusment from the present overvalued state.
As the currency becomes overvalued over a long period of time, the nation begins to deindustrialize (due to importing too much) and suffers from asset bubbles (due to artificially low interest rates).
Then there is a crisis and the currency adjusts rapidly downward.
The bigger the overvaluation, the bigger the fall. You usually get an overcorrection as the current account swings into surplus.
How can consumers buying Chinese goods be a sign of strength in China, but investors buying into US companies be a sign of weakness in the US?
Because they are the same damn thing.
For the US to run a trade deficit with the rest of the world, we have to be buying their goods and they have to be re-investing the proceeds back into buying US assets.
That's the only possible way you can have a trade deficit!
Look, the rest of the world sells us an apple for 1 dollar. Now, what does the world do with the dollar? We don't live in an age of specie flows, so they can't spend that money at home. It's fiat, and must be spent in the U.S.
Option A) It buys something from the US -- a peach. Trade is balanced.
Option B) It invests the money in the US -- it buys a bond, or a share of stock. Trade is not balanced.
But those are the only two options.
So saying the rest of the world is a net purchaser of US financial assets is exactly the same thing as the rest of the world is a net exporter to the US of their goods.
The US is attracting so much foreign investment precisely because it's economy is in a very strong position.
No, the US is not "attracting" foreign investment, the US is selling off its assets to the rest of the world in exchange for higher present consumption.
Meanwhile US companies and investors are investing heavily abroad.
No they are not. They own a total of 7.7 Trillion of foreign assets, whereas the rest of the world owns 43.6 Trillion of US assets.
That's not weakness, it's integration.
OK. Can I integrate with your balance sheet along the same terms? I'll end up with $44,000 of your assets, and you'll end up with $6,700 of my assets. It's equal! We will dance in mutual friendship.
The USA today is not even remotely comparable to Russia in the 90s.
You'd be surprised to learn that as far as international trade goes, our biggest exports are commodities. No, we are not Russia, of course, but then concerns about the U.S. currency are much bigger than in Russia -- I was using Russia as an example of the pain of currency adjustment. I was not saying that we were Russia.
Statistics eh? What can you do. The stats you gave are the fed's view of dollars. Foreign assets priced in foreign currency are not included. The net US international investment position is actually $34tn in assets and $49tn in liabilities. That's in deficit, but like I said that's mainly due to the strength of the dollar (currency collapse my arse) depressing the relative value of US owned foreign assets. If the currency were to drop, they would even out.
As long as foreign investment is going into productive assets this is fine. Many countries have run extended periods of trade deficit for decades, including the US, and it's been no problem. Being a wealthy country that buys stuff is not a bad thing. The problem comes if you're running a deficit and the inward investment dries up or reverses. Then your deficit is being funded by debt, and you're in big trouble. That's what happened to Russia in 1998.
So what actually matters is that you run a productive economy. Protectionism and subsidies is (and I can't believe I have to spell this out) not the way to run a productive economy.
I think this is reversed. A currency can be devalued a number of times before it stops being used as the reserve currency. Reserve currency status does not prevent devaluation, it allows devaluation. Think of the Roman Empire debasing the coinage for hundreds of years before people gave up on it. The post Bretton-Woods system goes back to the 70s -- we are just on decade number 5. Lots of devaluations are ahead.
Well, now the dollar is not just a reserve currency, it's a floating one. I'm not sure to what degree "devaluation" is a meaningful concept in that environment - certainly not "a devaluation", referring to a discrete event. The devaluation is a continuous, ongoing operation, as exchange rates move in real time, and as CPI changes happen.
So when economists talk about "devaluation", they include floating currencies. What that means is that the investment demand for the currency declines, causing the currency to decline.
What are the mechanisms that would cause the investment demand to decline? It can be any of
- different tax treatment
- reduction in respect for property rights of foreign investors
- changes in interest rates
- political instability causing fears of the above
Other factors may also come into play. But at some point, some of these factors cause foreign investors to take a second look at whether they should reduce their purchase of dollar assets, and that reduction in investment demand causes a devaluation.
If the demand for foreign investment in the US falls below the demand for US investment abroad, then what happens is that the currency falls so that the trade balance swings away from deficit and into surplus. That is true irrespective of whether we need those foreign imports -- we will need to find domestic substitutes or do without. Therefore this devaluation creates hardships.
But none of the above necessarily means that the dollar stops being a reserve currency. It's enough that the rest of the world pairs back their positions, as the relevant factor is the flow, not the stock.
The net US international investment position is actually $34tn in assets and $49tn in liabilities. That's in deficit, but like I said that's mainly due to the strength of the dollar
And see the graph with the steeply falling blue line, which is our balance. What I am saying is that continuing this for another 40 years is not sustainable.
That's in deficit, but like I said that's mainly due to the strength of the dollar (currency collapse my arse) depressing the relative value of US owned foreign assets. If the currency were to drop, they would even out.
OK, so you again confuse my argument, which is that the dollar is overvalued, with the claim that the dollar has already collapsed. I am not claiming it has collapsed, I'm claiming it is overvalued, and it will need to adjust sharply down.
I don't know why this is so hard to get straight. Then you counter with "if the currency were to drop, they would even out", which is the whole point I've been making!
When a currency is overvalued, it eventually drops to bring the trade into balance, and that is the currency crisis.
But the evening out is painful, because it means we can no longer afford the things that we rely on the foreign sector to provide, and have lost the ability to provide for ourselves via de-industrialization. That means, shortages, lower living standards, etc.
This goes back to understanding why the dollar is overvalued, which you claim is some random inexplicable thing, like why does J Lo have so many husbands. Who knows, it's a mystery! But it's not a mystery, it is just supply and demand. The dollar demand is foreign demand for US goods, combined with foreign demand for US assets. The dollar supply is domestic demand for foreign goods, and domestic demand for foreign assets. These meet, and that determines the dollar's value.
Therefore the high dollar is not a cause for extreme levels of foreign demand for dollar assets, it's the result of that elevated asset demand.
How do we know that this demand for dollar assets is irrational? Because the returns the foreign sector gets from the US is too low in comparison to their own investment opportunities domestically.
That means that they are purchasing dollar assets for non-investment reasons -- they are buying them in order to promote domestic production and support exports.
That means those dollar assets are being bought indiscriminately, and at scale, pushing down interest rates in the US and creating asset bubbles. Now that's a whole separate discussion -- the distortionary effects on interest rates -- but I brought up the scale of the asset purchases as evidence that these trade surpluses cannot continue indefinately. At some point, we will run out of assets that we are willing to sell to the foreign sector. And the foreign sector is not building new assets here, they are purchasing existing assets. You can see this from the either the BEA data or the FoF data. about 1/3 of the foreign asset purchases are US equities, 1/3 are US bonds, and 1/3 are direct investment, which is 99% acquisition of existing companies and 1% creation of new capital:
So what actually matters is that you run a productive economy.
Yes, but you cannot run a productive economy with massive social unrest and permanent price distortions in the capital markets. OK, so what if the entire nation de-industrializes and needs to constantly borrow from the foreign sector to get the next consumption drop? That's sustainable, right? What if each home in the U.S. costs 3 million dollars and is owned by some REIT, what does it matter if an entire nation is forced to become renters -- it worked well for Ireland, so why can't it work for us, right?
Well, that's a recipe for social unrest in which the US decides it no longer respects property rights, and that's the point when the investment demand for dollars drops, and we swing into a current account surplus with the crisis I mentioned. Except then we will look around and see a deindustrialized commodity exporter with massive social unrest, and maybe then you'll stop saying "what's the matter? This is fine".
Protectionism and subsidies is (and I can't believe I have to spell this out) not the way to run a productive economy.
At some point you have to go beyond buzzwords and actually string some thoughts together, based on real data, and a sober analysis of whether these global imbalances can continue. Waving red flags like ZOMG Protectionism!!! is not a substitute for that necessary work (I can't believe I actually have to spell this out).
How do we know that this demand for dollar assets is irrational? Because the returns the foreign sector gets from the US is too low in comparison to their own investment opportunities domestically.
I like your general analysis. But must pick a nit here. In any market, you don’t have irrational players at scale. I would say assets in the rest of the world are nominally over valued and at high risk of devaluation. Rest of the world overly concentrates there wealth in real estate without equivalent property tax structure to the usa. This is at risk from new property taxes (already proposed in China), and people simply moving around (electronically if not physically, though both are risks). if I was a land holder in China or india, me diversifying by buying us assets would make a lot of sense. And a rich person in the usa, it is even more risky to own land in China and india (outright disallowed, also at risk for new property taxes, etc).
The usa will be fine as long as the top 5% of the worlds merit and Capital gravitates towards the usa. i would simply pay attention to the Uber wealthy (musk, bezos, gates, page etc). When they start relocating together into the same place, Pay attention. Right now they are mostly in the usa, with some minor presence from page in New Zealand and Singapore, and maybe London.
Comments
It's true foreign ownership of US stock has risen, but US ownership of foreign assets has also risen roughly in line. That's globalisation working in both directions. Right now there is an imbalance, but that's due entirely to the strength of the US dollar inflating the value of US assets. What's actually happening is the opposite of the currency crisis you fear.
The USA today is not even remotely comparable to Russia in the 90s. That's completely absurd. The US is attracting so much foreign investment precisely because it's economy is in a very strong position. How can consumers buying Chinese goods be a sign of strength in China, but investors buying into US companies be a sign of weakness in the US? Meanwhile US companies and investors are investing heavily abroad. That's not weakness, it's integration.
Foreign holdings of US Assets, as of Q2 2021 are 43592.2 Billion[1]
US holdings of foreign assets are: 7694.6 Billion.[1]
We owe the world 43.6 Trillion, and they owe us 7.7 Trillion. That's a net debt of 35.9 trillion.
If by "right now", you mean we reached that 36 Trillion of net debt through steady growth since the 1970s, then I agree with you - assuming "right now" refers to a 50 year period of systemic and growing trade deficits.
No, it's due to the rest of the world desiring to run trade surpluses against the U.S. in order to support an export led growth policy.
All of East Asia has industrialized on the back of running large export surpluses to the U.S. That's a strategic policy decision to drive the growth of manufacturing, and it is implemented by purchasing dollar denominated assets.
One side effect of these purchases is an overly strong dollar (as well as excessively low interest rates) but then that's what we had for most of the last 50 years.
It's not like the dollar is too strong as a result of some accident of the weather, and then this causes a trade deficit just out of nowhere. Golly, how did that happen?
I am not saying we are in a crisis right now. The reason why a crisis happens is because the currency becomes overvalued! That's where we are right now. The crisis is the future downward adjusment from the present overvalued state.
As the currency becomes overvalued over a long period of time, the nation begins to deindustrialize (due to importing too much) and suffers from asset bubbles (due to artificially low interest rates).
Then there is a crisis and the currency adjusts rapidly downward.
The bigger the overvaluation, the bigger the fall. You usually get an overcorrection as the current account swings into surplus.
Because they are the same damn thing.
For the US to run a trade deficit with the rest of the world, we have to be buying their goods and they have to be re-investing the proceeds back into buying US assets.
That's the only possible way you can have a trade deficit!
Look, the rest of the world sells us an apple for 1 dollar. Now, what does the world do with the dollar? We don't live in an age of specie flows, so they can't spend that money at home. It's fiat, and must be spent in the U.S.
Option A) It buys something from the US -- a peach. Trade is balanced.
Option B) It invests the money in the US -- it buys a bond, or a share of stock. Trade is not balanced.
But those are the only two options.
So saying the rest of the world is a net purchaser of US financial assets is exactly the same thing as the rest of the world is a net exporter to the US of their goods.
No, the US is not "attracting" foreign investment, the US is selling off its assets to the rest of the world in exchange for higher present consumption.
No they are not. They own a total of 7.7 Trillion of foreign assets, whereas the rest of the world owns 43.6 Trillion of US assets.
OK. Can I integrate with your balance sheet along the same terms? I'll end up with $44,000 of your assets, and you'll end up with $6,700 of my assets. It's equal! We will dance in mutual friendship.
You'd be surprised to learn that as far as international trade goes, our biggest exports are commodities. No, we are not Russia, of course, but then concerns about the U.S. currency are much bigger than in Russia -- I was using Russia as an example of the pain of currency adjustment. I was not saying that we were Russia.
[1] https://www.federalreserve.gov/apps/fof/guide/l133.pdf
Statistics eh? What can you do. The stats you gave are the fed's view of dollars. Foreign assets priced in foreign currency are not included. The net US international investment position is actually $34tn in assets and $49tn in liabilities. That's in deficit, but like I said that's mainly due to the strength of the dollar (currency collapse my arse) depressing the relative value of US owned foreign assets. If the currency were to drop, they would even out.
https://www.bea.gov/data/intl-trade-investment/international...
As long as foreign investment is going into productive assets this is fine. Many countries have run extended periods of trade deficit for decades, including the US, and it's been no problem. Being a wealthy country that buys stuff is not a bad thing. The problem comes if you're running a deficit and the inward investment dries up or reverses. Then your deficit is being funded by debt, and you're in big trouble. That's what happened to Russia in 1998.
So what actually matters is that you run a productive economy. Protectionism and subsidies is (and I can't believe I have to spell this out) not the way to run a productive economy.
In essence, what really matters is that the USD remain the reserve currency.. That arrangement is what, it's (ab)using to run the show..
I think this is reversed. A currency can be devalued a number of times before it stops being used as the reserve currency. Reserve currency status does not prevent devaluation, it allows devaluation. Think of the Roman Empire debasing the coinage for hundreds of years before people gave up on it. The post Bretton-Woods system goes back to the 70s -- we are just on decade number 5. Lots of devaluations are ahead.
Well, now the dollar is not just a reserve currency, it's a floating one. I'm not sure to what degree "devaluation" is a meaningful concept in that environment - certainly not "a devaluation", referring to a discrete event. The devaluation is a continuous, ongoing operation, as exchange rates move in real time, and as CPI changes happen.
So when economists talk about "devaluation", they include floating currencies. What that means is that the investment demand for the currency declines, causing the currency to decline.
What are the mechanisms that would cause the investment demand to decline? It can be any of
- different tax treatment
- reduction in respect for property rights of foreign investors
- changes in interest rates
- political instability causing fears of the above
Other factors may also come into play. But at some point, some of these factors cause foreign investors to take a second look at whether they should reduce their purchase of dollar assets, and that reduction in investment demand causes a devaluation.
If the demand for foreign investment in the US falls below the demand for US investment abroad, then what happens is that the currency falls so that the trade balance swings away from deficit and into surplus. That is true irrespective of whether we need those foreign imports -- we will need to find domestic substitutes or do without. Therefore this devaluation creates hardships.
But none of the above necessarily means that the dollar stops being a reserve currency. It's enough that the rest of the world pairs back their positions, as the relevant factor is the flow, not the stock.
The Fed's view is relevant for analyzing dollar flows, but I'll happily go with the BEA data. Take a look here: https://www.bea.gov/news/2021/us-international-investment-po...
And see the graph with the steeply falling blue line, which is our balance. What I am saying is that continuing this for another 40 years is not sustainable.
OK, so you again confuse my argument, which is that the dollar is overvalued, with the claim that the dollar has already collapsed. I am not claiming it has collapsed, I'm claiming it is overvalued, and it will need to adjust sharply down.
I don't know why this is so hard to get straight. Then you counter with "if the currency were to drop, they would even out", which is the whole point I've been making!
When a currency is overvalued, it eventually drops to bring the trade into balance, and that is the currency crisis.
But the evening out is painful, because it means we can no longer afford the things that we rely on the foreign sector to provide, and have lost the ability to provide for ourselves via de-industrialization. That means, shortages, lower living standards, etc.
This goes back to understanding why the dollar is overvalued, which you claim is some random inexplicable thing, like why does J Lo have so many husbands. Who knows, it's a mystery! But it's not a mystery, it is just supply and demand. The dollar demand is foreign demand for US goods, combined with foreign demand for US assets. The dollar supply is domestic demand for foreign goods, and domestic demand for foreign assets. These meet, and that determines the dollar's value.
Therefore the high dollar is not a cause for extreme levels of foreign demand for dollar assets, it's the result of that elevated asset demand.
How do we know that this demand for dollar assets is irrational? Because the returns the foreign sector gets from the US is too low in comparison to their own investment opportunities domestically.
That means that they are purchasing dollar assets for non-investment reasons -- they are buying them in order to promote domestic production and support exports.
That means those dollar assets are being bought indiscriminately, and at scale, pushing down interest rates in the US and creating asset bubbles. Now that's a whole separate discussion -- the distortionary effects on interest rates -- but I brought up the scale of the asset purchases as evidence that these trade surpluses cannot continue indefinately. At some point, we will run out of assets that we are willing to sell to the foreign sector. And the foreign sector is not building new assets here, they are purchasing existing assets. You can see this from the either the BEA data or the FoF data. about 1/3 of the foreign asset purchases are US equities, 1/3 are US bonds, and 1/3 are direct investment, which is 99% acquisition of existing companies and 1% creation of new capital:
https://www.bea.gov/news/2021/new-foreign-direct-investment-....
So 1/3 of 1% of that foreign investment is actually "productive", as you say.
No, the trade imbalances we've seen are unique in terms of scale. A good overview is here:
https://www.cfr.org/blog/why-global-trade-imbalances-could-g...
Yes, but you cannot run a productive economy with massive social unrest and permanent price distortions in the capital markets. OK, so what if the entire nation de-industrializes and needs to constantly borrow from the foreign sector to get the next consumption drop? That's sustainable, right? What if each home in the U.S. costs 3 million dollars and is owned by some REIT, what does it matter if an entire nation is forced to become renters -- it worked well for Ireland, so why can't it work for us, right?
Well, that's a recipe for social unrest in which the US decides it no longer respects property rights, and that's the point when the investment demand for dollars drops, and we swing into a current account surplus with the crisis I mentioned. Except then we will look around and see a deindustrialized commodity exporter with massive social unrest, and maybe then you'll stop saying "what's the matter? This is fine".
At some point you have to go beyond buzzwords and actually string some thoughts together, based on real data, and a sober analysis of whether these global imbalances can continue. Waving red flags like ZOMG Protectionism!!! is not a substitute for that necessary work (I can't believe I actually have to spell this out).
I like your general analysis. But must pick a nit here. In any market, you don’t have irrational players at scale. I would say assets in the rest of the world are nominally over valued and at high risk of devaluation. Rest of the world overly concentrates there wealth in real estate without equivalent property tax structure to the usa. This is at risk from new property taxes (already proposed in China), and people simply moving around (electronically if not physically, though both are risks). if I was a land holder in China or india, me diversifying by buying us assets would make a lot of sense. And a rich person in the usa, it is even more risky to own land in China and india (outright disallowed, also at risk for new property taxes, etc).
The usa will be fine as long as the top 5% of the worlds merit and Capital gravitates towards the usa. i would simply pay attention to the Uber wealthy (musk, bezos, gates, page etc). When they start relocating together into the same place, Pay attention. Right now they are mostly in the usa, with some minor presence from page in New Zealand and Singapore, and maybe London.