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
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.