Relevant and even prescient commentary on news, politics and the economy.

A study in the dynamics of international flows… #3

Mr. Krugman said yesterday that the economy is “awash in excess savings with nowhere to go”. If we are awash in excess savings, why do we borrow from foreigners?

Let’s look at this equation to determine net borrowing from foreigners…

Current Account deficit (net borrowing from abroad) is… (M – X) = (G – T) + (I – S)

M = imports
X = exports
(M – X) = net borrowing from abroad
G = govt spending
T= tax revenues
(G – T) = net public borrowing
I = private investment
S = private saving
(I – S) = net private borrowing

For US data from the 2nd quarter of 2013, I get this equation… (in billions of $)

Current Account deficit $422 = $893 + $2529 – $3000

(M – X) = $422
(G – T) = $893
(I – S) = -$471
I = $2529
S = $3000 (labor and capital private savings combined)

We do not have enough domestic savings to cover domestic investment and net govt borrowing. Personal savings have fallen from over $646 billion per year in 1st quarter 2011 to $461 in 2nd quarter of 2013. So, we borrow from or sell assets to foreigners to the amount of $422 billion per year.

If we were awash in “excess” savings, would we be borrowing from abroad?

Weak labor income in the US contributes to the decline in personal savings, which makes the US seek foreign funds for domestic investment and government spending. For comparison sake, personal savings in 1972 was $467 billion and government spending was $1420 billion (2009 dollars). We still have the same personal savings $461 billion but government spending is double in real terms at $2900 in 2nd quarter 2013. We had a lot more personal savings back in 1978 relative to now. So again, why does Mr. Krugman say we are awash in excess savings? He must not be talking about personal savings.

And also, what does he mean that the savings have nowhere to go? US investors have been finding good returns on their money overseas. In fact, US investors find better returns on their money overseas than foreign investors find in the US.

The puzzle of paying less to foreign lenders

Our Current Account deficit is paid for by borrowing from foreigners or selling our assets to them. The US is a large debtor nation, so one would assume that we have to service this debt with large payments to foreigners. Those payments would include lots of interest and principal. However, there is a puzzle. The US actually receives more payments from its smaller investments overseas than it pays to service the larger investments by foreigners in the US.

This may be surprising to some people that the US actually has an “investment” surplus with foreign countries, in spite of the fact that we borrow more in total value $$. This surplus has normally run $20 to $30 billion per year in favor of the US. The reason for this is that US investors take on greater risk overseas, and get compensated better for that. Investing in the US is a low return, low risk venture.

So when Mr. Krugman says that the savings have nowhere to go, he must not know that overseas investments are paying relatively well.

Now, as long as US interest rates stay low, the US will pay out less principal and interest to foreigners. So there is reluctance in the US financial sector to raise interest rates, because payments to foreigners might end up being greater than what the US receives from overseas. It’s a profit thing. The US Current Account deficit is easier to tolerate if the financial sector is realizing a surplus. Ahem…

Foreigners are now investing overseas more…

We have seen the Current Account deficit of the US fall from over $800 billion in 2006 to $422 in the 2nd quarter of 2013. So the financial sector sees “progress” in minimizing payments to foreigners. Part of the explanation for this decline in the Current Account deficit is the depreciation of the US dollar which favors exports. and Part of the explanation for the depreciation of the US dollar is its declining share as a reserve currency. (see post at econbrowser)

Another explanation for the decline in the trade deficit is the increasing risk and greater returns from investing overseas. Even foreigners are finding it more profitable to invest overseas than in the US. Thus, there is less demand for US dollars, less net lending to the US from foreigners, and the result is a lower Current Account deficit. One can point to asset bubbles all around the world, Brazil, China, UK and other countries that seem to be attracting international flows of money.

So do we really need to borrow from abroad? Are domestic savings awash or not? Has the dollar just not depreciated enough? Is the US asking for foreign investment like Norway did back in the 1960’s in order to develop future productive capacity? Is the US investing in future productive capacity? How much of the international flow is “play” money? and how much of it is being invested in viable productive capacity for the future?

More to come in this series…

Comments (2) | |

A study in the dynamics of international flows… #2

In part #1 of this series on international flows, Norway’s trade deficit of the 1960’s was associated with foreign investment coming into their country. So the net trade deficit of the Current Account was matched by the net foreign investment surplus of the Capital and Financial Account.

There is a principle in international income accounting… A country’s Current Account balance is matched by Net Foreign Investment.

But we need to look at the relationship more closely. Which one is driving the other? Does a trade deficit simply determine the amount of net foreign investment? or does the desire of investors in general determine the amount of a trade deficit?

You might find someone saying that the US trade deficit is financed by the US receiving loans and investments from abroad. But we must realize that foreign investors want to invest their money in the US. Their desire can change the level of our trade deficit. The US is safe, even though the returns are lower. There is a risk-return relationship as to why foreign investors want to put their money in US stocks or real estate. And so we need to realize that the changing desire of investors, domestic and foreign, can determine the level of our trade deficit.

So what happens when China runs a Current Account surplus? China is taking the surplus and accumulating financial assets abroad. China could keep the surplus for themselves but what would happen to their currency? With too much demand for their currency from imports, their currency would appreciate making their exports most costly. They want to keep their exports cheap. So China puts that surplus into other countries through the foreign-exchange market. The other countries receive those funds.

If we don’t like receiving so many funds from China, what can we do about it? Well, we could change the Current Account balance that we have with China and other countries. How would we do that?

Savings and Investment

The Current Account balance is equal to the net savings and net borrowing, public and private, within a country. We have the equation…

Current Account deficit (net borrowing from abroad) = (G – T) + (I – S)

G = govt spending
T= tax revenues
(G – T) = net public borrowing
I = private investment
S = private saving
(I – S) = private net borrowing

So, if we wanted to change our Current Account deficit to a surplus, we would have to…

  • raise taxes (kind of unpopular and there is a movement against higher taxes).
  • lower govt spending (being done as we speak).
  • raise private saving (hard to do when labor share of income is falling and returns are so low).
  • lower private investment (but the Fed is trying their hardest to raise investment)

Companies like Walmart that rely on cheap imports want taxes to be lower. They want people to be paid less so that savings rates are lower. They want their employees to use government services to raise government spending. They want investment to be financed by money from foreign countries, and not domestic sources. It creates a bigger import market. Companies like Walmart perpetuate the US trade deficit because it increases their business.

You may be able to see that the US trade deficit is a result of lowering taxes and lowering the private saving rate over the years. A situation was created where we did not give ourselves enough domestic funds for govt spending and private investment. So we had to get those funds from abroad, which exacerbated the trade deficit.

But hold on… there are many ways to grasp this dynamic of a trade deficit…

Let’s look at this from an opposite perspective… Maybe the drop in tax revenues and the saving rate was the result of the trade deficit? Let’s face it, if all of a sudden you have these huge imports coming in at low prices, imports will increase. Then all of a sudden you have these foreign countries bringing back those dollars to invest in the US (by the dynamic of Balance of Payments and currency stabilization). Then we realize that the government can lower taxes because other countries are buying its bonds. Then we can suppress real wages, because savings from labor is no longer needed.

But then from another perspective, did imports rise because there was previously a big wave of foreign funds coming to the US?

Let’s go back in time a little further… the early 1980’s

In the early 1980’s, interest rates soared in the US thanks to Volcker. Yes, and returns to investment rose along with them. Foreigners wanted to invest in the US by the truckloads. Private saving was dropping. The US was safe and had long-term growth plans. Japan had money to invest. (I remember the house in Hawaii I was living in went from $130,000 to over $1 million.) Europe had troubles with unemployment and low growth. As more foreign money was being attracted to the US, the US trade balance (Current Account) started to turn negative.

But when did imports start to increase? Imports started to increase in the second half of 1982 into the first half of 1983… as the high interest rates of the Volcker recession were coming down. Coincidence? Not really. The dynamics for equilibrium in the international flows encouraged growth in import markets from tremendous foreign investment in the US. At that point, the US had to find a way to return those foreign investments by way of the Balance of Payments. The money was there to develop the import markets. And the development of those import markets was rapid, as is the beauty of capitalism.

A case can be made that Volcker is to “blame” for triggering the trade deficit by attracting large amounts of foreign investment in US assets. We have had 30 years of rising bond prices and many think the end of that is now. Will foreigners continue to invest in US assets? Will companies like Walmart be able to influence politics in order to sustain low domestic saving, private and public?

The dynamics that created the US deficit and to this day sustains it are thoroughly logical. There is no inherent problem with a trade deficit, but the US trade deficit has its advantages and its risks.

Comments (15) | |

Not even a cursory fact check

We all make mistakes sometimes, but there is a lot of this in the news.

Lifted from Robert’s Stochastic Thoughts:

Dianne Barrette of Winter Haven Florida claims that instead of paying $54 a month for health insurance (no hospital coverage and a $ 50 deductible for office visits) she will have to pay $ 591 for ACA level health insurance. says that a single adult over 50 in Winter, Haven which is in Polk County, Florida can get Obamacare (catastrophic insurance) for $235.08 a month (before subsidies, and she states an income which would make her eligible).

I discovered this after the intense journalistic effort of googling Winter Haven Florida county and a few minutes at (no log in required to check prices). This seems to have been too much work for Fox (no surprise) or CBS (the irony is killian me).

Comments (7) | |

Carried Interest — a tax privilege for the rich whose end time has come

by Linda Beale

Carried Interest — a tax privilege for the rich whose end time has come
I should have written about this long ago, but a recent “dealbook” by my former colleague Steven Davidoff, A Chance to End a Billion-Doillar Tax Break for Private Equity, New York Times (Oct. 23, 2013) reminded me of the import of a recent court decision–Sun Capital Partners (No. 12-2312 First Circuit Cout of Appeals July 2013), –important for its implications for the private equity industry’s privileged “carried interest” tax treatment (income to managers currently treated as preferentially taxed capital gains rather than ordinary compensation income) and the assumed treatment of the pension obligations of employees of companies taken over by those funds (ability of private equity funds to disavow a company’s pension obligations to its ordinary workers through bankruptcy).

Comments (2) | |

7 Million Insured versus 2.7 Million Millenials

The argument has been the ACA depends on a number of the young to sign up for healthcare insurance on the PPACA or at least this is what S.E. Cupp believes and suggested on This Week with George Stephanopoulis.

There’s two problems, one is the technological, sort of mechanics of this. Obamacare relies on Millennials, these young invincibles who have never bought health insurance in the past, to suddenly change their behavior and buy something they don’t think they need. And in some cases can’t afford. That mechanical issue remains to be seen and the web site rollout has affected that. But it also reads as an inability to speak their language. Donna, you might call an 800 number and sit on the phone for 20 minutes  .  .  .  Millennials are not used to that. They do not meet in person with Insurance agents  .  .  .  They need a website that works, tat gets them  .  .  . ”

Howard Dean:

I would have to disagree with S.C. This has been written on by many, many people, so I am not just picking on her. It is not true that if young people do not sign up the program is not going to work. That is false and the reason it  .  .  .

Comments (0) | |

Deficit Disorder Symptoms–via Naked Capitalism/New Economic Perspectives

by Linda Beale

Deficit Disorder Symptoms–via Naked Capitalism/New Economic Perspectives

Yves Smith over at Naked Capitalism has an insightful re-post today on the way the right in particular–and most in the media and public–talk about deficits and misunderstand the relative importance of failures to invest in physical and capital infrastructure (roads, education…) versus the relative unimportance of the US government deficit and national debt.  See Attention: Deficit Disorder and the Real Crisis Ahead, Naked Capitalism (Oct. 29, 2013), reposting article with the same title by Fadhel Kaboub, New Economic Perspectives.

Economic failure exists when (1) young people can’t get jobs, (2) old people can’t get health care and sufficient income to manage after retirement, and (3)  everybody else can’t manage well using potholed roads, unreliable energy distribution systems, casino-capitalism banks, and holding jobs in industries that treat CEOs (even those who stumble) like Gods and workers like peons. We already face situations (1) and (3) in most aspects of our lives.  If the flat-world GOP politicians have their way in cutting benefits of Social Security and Medicare rather than increasing the payments expected from those who have made off like bandits under the reaganomics winner-take-all system that has exacerbated inequality and moved us into a have/have-not economy, we will soon face (2).  When economic failure of that dimension exists, it is the ultimate burden to thrust upon the backs of our children and grandchildren.  In our case, it would represent the result of our short-sighted instant gratification desire to harvest carbon-based energy come what may; “develop” coastlines (more and more for second or sixth homes for the ultra-rich) and wilderness and wildlife refuges for the wealthy few at the expense of most other people and the rest of the world’s living beings;  while “protecting” gigantic, too-big-to-fail multinational enterprises like the big banks, Big Pharma, Big OIL and Big IP from having their workers unionize and demand a fair share of the revenues that those very workers generate and “simplifying” the tax code so that it collects less revenue, particularly from the ultra well off.

Comments (2) | |

Dianne Feinstein Should Hire Snowden!

Apparently, Snowden knew more than Dianne Feinstein and Barrack Obama about NSA spying on friendly leaders.
Dianne and Barrack never knew that the NSA was spying on friendly leaders such as Merkel.

“Unlike NSA’s collection of phone records under a court order, it is clear to me that certain surveillance activities have been in effect for more than a decade and that the Senate Intelligence Committee was not satisfactorily informed.

“With respect to NSA collection of intelligence on leaders of US allies – including France, Spain, Mexico and Germany – let me state unequivocally: I am totally opposed,” she said..

Feinstein also provided the first official confirmation of a German report that indicated Merkel’s phone had been monitored for more than a decade. “It is my understanding that President Obama was not aware Chancellor Merkel’s communications were being collected since 2002,” Feinstein said. “That is a big problem.”

How long has Feinstein chaired the Senate Intelligence Committee? Four years?

Is she now going to give Snowden a medal for keeping her informed? Will she now set her beady, vengeful eye on those that approved spying on allied leaders? Maybe fire them? Maybe…the mind reels at the possible repercussions…bring them to justice?

Maybe we should fire Booz Allen. After all, James Clapper, our Head Spy and Director of National Intelligence, came from Booz Allen. And Clapper’s predecessor under Bush, John “Mike” McConnell, was vice President of Booz Allen.

Maybe someone at Booz Allen gave the go ahead to spy on Merkel. May Clapper; maybe McConnell. Or maybe some newbie who thought it would be fun to see what Merkel and the others were thinking?

Who is running the show here? Clapper? McConnell? Booz Allen? Certainly not Feinstein. When private entreprise and goverment get too cozy, it is hard to separate one worm from another.

Anyway, give Snowden the medal and hire him.

Tags: Comments (0) | |

A study in the dynamics of international flows… #1

Is the US trade deficit a problem? Are we somehow incapable of competing in the international market? Is there anything good about being such a debtor nation to China? Is the US really losing jobs to other countries?

These issues are heated. People are passionate about their views. Yet, it seems most people don’t understand the dynamics of international flows of goods, services and capital and the like. So what are the answers?

I will write a series of brief posts into international flows.

A Trade Deficit can be good…

To get a grip on international economics, I first start with the basic principle of the balance of payments. The sub-accounts of international trade must balance to zero. The sub-accounts are broadly identified as the Current Account and the Capital and Financial Account. The Current Account involves trade of goods, services, incomes and unilateral transfers (like gifts). The Capital and Financial Account involves the sales of assets like real estate, stocks, bonds, government securities and even bank deposits.

In accounting, an import in the Current Account is offset by borrowing from foreigners in the Capital and Financial Account.

Comments (0) | |

Tax Filing Season Delay

by Linda Beale

Tax Filing Season Delay

The IRS announced that the 16-day federal shutdown will cause a delay in the start of tax filing season by a week to two weeks.  The exact date when returns will first be accepted, to be announced in December, was to have been January 21, but may now be January 28 or later.  See Annie Lowrey, Citing Shutdown, I.R.S. Says Tax Season Will Start Late, New York Times (Oct. 22, 2013). The delay is necessary to ensure that the IRS systems are functioning appropriately to handle the filings.  The shutdown delayed that process as 90% of IRS employees were on furlough starting October first, and the IRS has a backlog of items requiring attention now that employees are back.  Id.

Comments (1) | |