On Econbrowser Menzie Chinn has posted about an increase in the scale of US international net indebtedenss. Since the late 1980s the US has been a net debtor internationally, borrowing more from abroad then we are lending and investing there. The increase in this net indebtedness has noticeably accelerated since our current POTUS took office, and especially this year. The size of that net indebtedness has gone from about 40% of US GDP to somewhat more than 55%, a pretty substantial increase, given that we have been in this condition for over three decades and in three years by more than a third. The fiscal stimulus of this year has definitely been overwhelmingly financed by foreign borrowing.
This increase in net indebtedness highlights a longstanding anomaly that now looks even more anomalous. Even though the US has been a net debtor for over three decades, it has remained a positive net earner on capital income arising from all those international capital movements in and out of the US. This is mostly measured by the primary income part of the international capital account, which last year was in surplus at a bit over $60 billion. What is more curious is that this does not seem to have changed much at all over the last five years, some slight changes here and there, but mostly unchanged. I confess to being mystified as to how an increase in net indebtedness by more than a third has led to essentially no change in the capital income payments situation.
The US does not borrow in any foreign currency. Foreigners buy Treasuries, but that is not borrowing. It is them turning their dollars into Treasuries. If they turned them all in Friday, we’d give them dollars. So there they’d be. I apparently don’t know what the ‘net indebtedness’ means. Is it borrowing by private corporations in foreign currencies compared to foreign corporations borrowing in our currency? Compared to what exactly? Count me confused.
Our surplus trading partners do what they can to maintain exchange rates that keep them surplus trading partners. It is US dollars paying foreign workers to lower wages and prices in the US. The downside for those foreign workers is that US firms that arbitrage prices against lower standards of living for those foreign workers give the sovereign governments of those foreign workers little incentive to attempt to raise the standard of living for those workers. This system works well for eradicating abject poverty and joblessness, but not so much for leveling out the standard of living for the world’s working class.
Thank you. That is the biggest advantage for MNC in sourcing production outside of the US. Direct wages are just a sideshow in comparison.
Trump’s Tariffs? Coronavirus? China’s Exports Are Surging Anyway
NY Times – August 31
ZHONGSHAN, China — This was supposed to be the year that China’s export machine began to stall. President Trump had imposed broad tariffs on Chinese goods. Countries like Japan and France pushed companies to shift production from China. The pandemic had crippled China’s factories by the end of January.
Instead, China Inc. has come roaring back.
After reopening in late February and early March, China’s factories began an export blitz that is still gaining steam. Exports soared in July to their second-highest level ever, nearly matching the record-setting Christmas rush last December. The country has grabbed a much larger share of global markets this summer from other manufacturing nations, entrenching a dominance in trade that could last long after the world begins to recover from the pandemic.
China is showing its export machine cannot be stopped — not by the coronavirus and not by the Trump administration. Its resilience lies not only in the country’s low-cost, skilled labor and efficient infrastructure but also a state-controlled banking system that has been offering small and large businesses extra loans to cope with the pandemic.
The pandemic has also found China better placed than other exporting nations. It is making what the world’s hospitals and housebound families need right now: personal protection gear, home improvement products and lots of consumer electronics. …
To be sure, China’s dominance of global manufacturing could be hurt by geopolitical shifts, such as if other countries demand that companies move part of their supply chains elsewhere. The United States and Japan have begun to do so. European governments like France’s have started to move in the same direction, particularly for medical supplies. Large companies with the capacity to set up entirely new supply chains elsewhere, like Foxconn of Taiwan and Apple, are exploring alternatives.
But the pandemic, which has grounded many flights and slowed logistics, has shielded China at least temporarily from attempts to relocate factories to other countries. Many multinationals have cut back on investment as global demand has slowed, and so have little money to set up new operations elsewhere.
“In the middle of a global recession, companies are not going to divest unless trade barriers force them,” said Joerg Wuttke, the president of the European Chamber of Commerce in China. “Companies would rather close facilities than open up new ones.”
Run,
“…That is (?) the biggest advantage for MNC in sourcing production outside of the US…’
[I am assuming “That” is better returns on capital because of lower effective costs on everything; land, plant, regulatory compliance, and labor.]
Or called Overhead. I just assumed you knew it.
@Fred,,
Good one! That is funny. The rats are trapped like, err, rats.
Barkley,
THX. Good topic.
NYT: … Families all over the world are sprucing up the homes they are now stuck inside. They have been buying everything from computer screens and stereo systems to power tools and home saunas — many of which are made in China.
Hongyuan Furniture in the southern city of Guangzhou has hired 50 extra workers after export orders for its home saunas more than doubled this year. …
Hongyuan says it has not yet encountered any new competition from home sauna manufacturers based elsewhere despite facing 25 percent American tariffs for the past two years. Hongyuan also has access to dozens of suppliers within an hour’s drive who compete vigorously to produce inexpensive glass doors and hinges at the lowest cost.
So Hongyuan can afford to import lumber across the Pacific from Canada, saw the wood and polish it and assemble it into home saunas, and then ship the saunas in kits back across the Pacific all for less than it costs to make saunas in the United States. Considerable hand labor is still involved, although Chinese-made automatic saws now take the lumber in one end and put out boards of various shapes and dimensions.
“Even with the 25 percent tariff, the manufacturers in China still have lower costs,” said Rachel Wang, the company’s export manager. …
(Not quite ancient history, from June 2019…)
After six years of manufacturing the cylindrical Mac Pro in Texas, Apple has shifted production of the new Mac Pro abroad to China, even as trade tensions escalate between the U.S. and China.
Apple’s Mac Pro was the company’s only major device assembled in the United States. The move comes as a surprise, as Apple faces increased tariffs on products imported to the U.S. from China. The tariffs would affect all of Apple’s products, including the iPhone, iPad, and all Mac computers.
Apple has signed with contractor Quanta Computer Inc., a company that has worked with Apple in the past, to manufacture their new Mac Pro. Quanta Computer has begun increasing production at a factory near Shanghai.
The decision is likely influenced by Quanta’s distance to other Apple suppliers across Asia, making it possible to achieve lower shipping costs than if components were shipped from the United States. Analysts have stated that any move Apple would make to move production out of China would take multiple years.
Apple had previously invested $100 million in tooling and other equipment for Flex Ltd., a manufacturing plant in Austin Texas, hoping to be able to shift some production back to the U.S. at the behest of policy makers. However, this has proved to be an expensive investment, and most Apple products are still primarily manufactured in China to keep production costs lower. …
(This was ostensibly because the tiny special screws
needed for the Mac Pro could only be obtained in China.)
So, it looks like the Trump
tariffs are making the trade
deficit even larger. Go figure!
Christopher Herbert. Sorry, but you are wrong, or at least confused. It certainly makes a difference whether government borrows within its own currency or in another, but even if it is borrowing in its own currency, it is still borrowing, and that is exactrly what the US Treasury is doing when it sells securities. Those are liabilities of the Treasury and assets of those who own them. They have leant the Treasury that money, which the Treasury will eventually have to pay back, in USD, when the securities mature, as well as pay interest on them until then.
The issue is that there is now this enormous amount of those out there held by foreigners, way more in amount than assets we own from foreigners. But somehow the assets from abroad Americans own are paying much more than what the assets foreigners own here pay them, including those US government securities, which are debt, heck, part of our “national debt,” and an increasing part of it.
So, the US owes more abroad than is owed to us from abroad, making us a net international debtor, which has been true since the late 1980s, while we continue to earn more from abroad on our assets than the foreigners earn from us, giving us a surplus on the internationa capital income account. This is the anomaly, and it is getting stranger all the time.
Does this help clear things up?
@Me,
“…but not so much for leveling out the standard of living for the world’s working class…”
[OK. the race to the bottom is working better than the race to the top.]
@Run,
“…I just assumed you knew it…”
[I did not know “you” who much less what “that,” but looking back I see that 12:01 pm is out of sequence. Is that a moderator trick?]
Ron:
If you notice, I can reply directly to you and my reply is slightly indented.
Dan and I had a conversation a while back about adding more capabilities to the board so commenters can stylize their writing along similar lines. We are still trying to get that done. Dan is going to take on a simple task for now of making the site more compatible to IPhones. We have heard it is a bear to accomplish communication to AB using an IPhone.
I can see all the comments to different people and posts on one page. It makes it easy to fix things.
Brad Selzer mentioned tax avoidance.
The tax avoiders move valuable intellectual property to a tax haven. The profits remain there, if it is re-invested there is no reason to repatriate the money, the globe is fairly liquid. Under this scenario, the net investment can remain out of balance for longer than the tax collector can stay liquid. Eventually Congress will capitulate, lower the tax and some of the money returns.
https://fred.stlouisfed.org/graph/?g=lrnC
January 30, 2018
Net Exports as a share of Gross Domestic Product, 2007-2020
https://fred.stlouisfed.org/graph/?g=v0Li
January 30, 2018
Net International Investment Position as a share of Gross Domestic
Product, 2007-2020
Tax avoidance is irrelevant. More debt means more dollars.
@Run,
OK, moderator trick it is. I recall that moderator thingy coming up before, but when I read your reply I was unsure it was to me because managing exchange rates via the purchase of deficit partner’s sovereign debt does effect labor cost and every other costs on the other side of the exchange rate from US.
To US firms which costs are sideshows and which costs are “comparative advantage” depends upon what product or service is being off-shored. Coders, call centers, and furniture builders are all labor intense, but manufacturing aluminum is capital infrastructure and resource intense.
But the race to the bottom works on all costs if deficit partners are the sovereign producer of a major reserve currency that is also an international exchange currency. IOW, US-based MNCs benefit from our exorbitant privilege in the post-Bretton Woods global economy. The EU runs a distant second. Of course then if our surplus trading partners ever stop buying our debt, then we are toast, but they would need to have something good cooking in the oven to not go down with the US. We live in a steady state thanks to mutually assured economic depression. Whether trade causes world peace or world war varies from time to time.
Ron:
You said something which caught my eye.
I dealt with off shore accounts payable while at one company who would always pay late. The supply base would call me and I would call them. What finally worked was when the supplier shut them off. Suddenly bills were paid and the company was up to date. For a while I was shipping 20-30 48 footers/week of parts and wire to China, Philippines, Thailand, and Malaysia besides various containers to Slovakia and France. If there is one I know is the cost of shipping and the inventory going back and forth which I could not touch.
Early on, I was consulting for Ingersoll Engineers on supply chain. I would help set up cells and teach the people how to schedule them. Worked in some major companies like CAT and some little ones like Warren Tool. There is a common thread here and it involves materials and how to handle it efficiently. Showed Parker Hannifin Fluid they did not need a tubing plant if they scheduled the capability they had properly and that came after I installed their MRPII system the first year.
I will be 72 this January. Been working 55 years and this is the year I have not worked. Mostly here, I read, edit, help some establish their graphs and charts on their posts. Occasionally, I have to intercede. It is rare though.
I do not know you from EV. What did you do in life? I am nosey.
Bill
Ron,
You touched on a point there that needs to be expanded. Capital infrastructure and resource intensive has about a net/net cost. Whether the company stamps metal in the US or in China, the dies and machines are roughly the same price. However, if they are manufactured in China, you get cost savings from both the build of the equipment, smelting of the iron, as well as cost savings from shipping….but not really, because either a US company such as Honeywell absorbs the excess profit and therefore does not make the goods cheaper. But I am not interested in this because this is an old news sort of debate that is unfortunately here to stay.
The point you touched on was coders, and other labor intense jobs being outsourced. Huge amounts of companies are outsourcing their back offices to China, India, and even for the Honeywell example, Costa Rica. Now this isn’t call center or low level jobs, these are the accountants, engineers, coders, systems engineers, financial analysts; degreed positions where they can pay $6-8 an hour for a 40 hour a week employee when 5 years ago they would need to pay a $60,000 a year salary plus benefits, and pay taxes. This is way more detrimental to our society, because companyies no longer value careers.
If the US corporate class does not value blue collar workers, and now white collar workers alike, we are in deep deep trouble.
Michael:
I have seen this too with sourcing professional jobs to India.
Capital infrastructure and resource intensive has about a net/net cost. This was what Buffet complained about with Hathaway. It costs more to ship out of China per 48 footer than shipping to China (I may have this reversed). The costs are in carrying that extra 5-6 weeks of inventory (ocean, dock, customs and delivery via train and truck). Overhead burden to Labor in China is far less also. If it is here to stay then how are you going to satisfy the trump minions?
@Michael Smith,
YES. Fortunately for me I am 71 YO and retired. If I were young I would move to New Zealand. Actually, when I was young I had wanted to move to New Zealand, but was in no position to do so and care for my aging parents. I had a good deal here and they were anchored here by family. I did not grow up with my half-brothers and half-sisters, so that bond was not there for me. But two half-brothers were my mom’s sons and three half-sisters were my dad’s daughters. The three litters grew up in separate households and I was an only child.
My girls range from 43 to 51 YO and all three are in well established careers with teenage to college grad children of their own. It is their kids that I am a little concerned about although the oldest boy is already well on his way to a decent career himself in marine biology. I have since my girls were in high school recommended to all young people to find a career outside of mainstream corporate America, whether in science, teaching, or nursing or just an SMB with tight neighborhood roots.
The US started down a dark path just after the end of WWII that was bound to end in deep, deep, trouble. We saw the exorbitant privilege bestowed up the dollar become disconnected from balanced trade when convertibility was ended by Nixon. Of course, that privilege bestowed by Bretton Woods had been a problem because Keynes’s bancor notes were rejected. So, we traded one stupid system for another in 1972.
The groundwork for financialization had already been laid in 1954 when the dividends tax credit was rescinded for the last time, which in effect enhanced the capital gains tax preference leading to endless buyouts and mergers of competitive firms rather than just consolidating losers (capital gains losses were never a tax problem). The first two LBO’s were in 1955.
All the time the US public zeitgeist was being fed a line about economies of scale being being more important than competition. Then they piled on a load about free trade making everyone better off because the loss of jobs was more than compensated by lower prices. If the working class gets much better off, then we are all going to die poor.
@Bill, a.k.a. Run,
I was a large system performance analyst and capacity planner, primarily for IBM z/OS mainframe hardware, then a little mainframe application system and TCP/IP network. Prior to getting outsourced to Northrop Grumman in 2006, the capacity planning part was full cradle to grave life cycle planning from budget, through performance assurance and disposition. If anything unexpected happened along the way then I had to figure it out and solve it. Along the way I wrote over one million lines of SAS code. After NG took over they handled all the budget and finance while I just produced service level and resource usage reports, without loss of my state (VA) benefits nor pay until they paid my state severance package to boot me and 50 other legacy employees in June 2015, just two months after my 66th BD.
My other career has been as a very lucky sucker given my humble beginnings with an illiterate median income highway construction worker dad and 8th grade mostly stay at home mom. Early mom managed a Highs Ice Cream store, then did a little retail clerking at Peeble’s before settling in as a mostly homemaker with a couple of childcare customers and sometimes as a school crossing guard. Since my parents were not able to pay my college , then I dropped out in the middle of first semester and got a job. I had learned in the previous summer that work was far less boring than school. I had some small grants but loans for just over half the cost.
I had gotten interested in computers while in 7th grade thanks to a family friend that worked at the Quantico base as a civilian biophysicist. He had wanted to interest me in organic chemistry instead, but when he gave me an Algol book because I had taken interest in his work computer, which took an entire building to house the compute power of a handheld calculator, then it tickled my math and logic bone. OTOH, organic chemistry looked like a whole new universe of boring to me. Both books had been his college texts. I got a job as a computer operator sorting cards and scanning OCR docs and was operating a small mainframe and programming in COBOL in less than six months. Choosing the path of the autodidact actually enhanced the problem solving skills that were needed in my eventual computer performance evaluation career rather than hindering them. Systems thinking gains more from exposure and exercise than from studious isolation memorizing for a test.
Ron:
Interesting, I am sure we can have some conversation now. Just a lowly Masters out of Loyola – Chicago. Third child stopped me from going farther. It was worth it and time to be home. I see patterns in numbers and would plan accordingly ignoring the computer read out for demand. Supply Chain is nothing glamourous and you just have to understand it to make it work with few algorithms if any.
Initial MRP was done monthly after all the data was collected and way too late. The company used Data 100s punch cards to feed the computer. Bumped the process up to twice a month. And in spite of fear. I killed the cards and went direct to the plants via mainframe and collected the data. We went to weekly planning. Life got good for my people even though OT was gone. We were meeting demand and issues before they became issues. As I was going out the door (laid off), my boss said to me “I will never forget how you automated our MRP and proved the overall Production plan.” I gave him my F-off look and left.
It is rare for me to interfere out here unless Bert has an issue. We are going to spruce up the place a bit and make it more user friendly
@Bill, a.k.a. Run,
Not knowing what caught your eye then I gave you a shotgun blast of my background. Prior to buying my first home in 2004 then my interest in economics had gone no further than to make me extremely wary about depending upon my own private investment in securities for retirement. But shopping for a home in 2004 made me acutely aware of a systemic economic problem that was bound to lead to a prolonged severe recession. I told my loan manager, who was sure that I was loopy, that the US could not build a stable recovery on rising residential real estate prices independent of a rise in wages.
I bought a 1959 built fixer that still needs fixing because of BoA stopping the draw on my prime rate HELOC in 1/2009 alongside my job outsourced under NG management and my wife’s firm in a series of mergers and downsizes. Borrowing at a higher interest rate did not seem like a good plan.
As soon as I moved in and got cable TV hooked up then I started watching every C-Span BookTV show on economics theory and history that I had the occasion to be free to watch every weekend. My wife started to wonder about what she was getting into, but I was paying all the bills except for her car which seemed like a good enough deal to her. I liked Ha-Joon Chang better than most. Alan Greenspan was naive beyond reason given his influence.
In 2006 I saw Mike Stathis present on his book “America’s Financial Apocalypse: How to Profit from the Next Great Depression.” Stathis was the first that I saw that validated my concerns from 2004. Sadly, Mike went totally off the reservation when the 2008 financial crisis struck. After the crisis had struck then I began looking for why it was allowed to play out like that. That lead to looking for a blog to settle into for an exchange of experiences and deeper learning, which ended with me finding EV, in no small part because Owen Paine reminded my of a old friend from the early 70’s. Also, Mark Thoma was the real deal and the open format and unbridled repartee of EV was another flashback from circa 1970, except back then we were sitting around in a circle passing the bong and listening to the Grateful Dead instead of typing on an online Internet computer.
At EV there were several comments critters that told me about John Maynard Keynes. Keynes is a fun read. So much of Keynes is familiar to me, but I really had not known anything about him previously except the derisive comments about him from conservatives. Keynes had been endemic to my New Deal evangelical upbringing, kissing cousin to Saint FDR. So, in my mind Keynes was not an academic, a scholar, nor an intellectual. Lord Keynes was a saint.
@Me,
“… Keynes had been endemic to my New Deal evangelical upbringing…”
[I.e., no one ever mentioned Keynes, but everyone mentioned things that Keynes had said.]
Keynes literally wrote the book on “Employment, Interest, and Money.”
@Run,
[Ops research has a lot of applications and specializations. Supply chain management is bread and butter OR, but home to a broad spectrum of complexity and cost benefit incentives. Just in time made OR famous. SAP and BPEX embed inventory management into point of sale systems with invoicing, shipping, and accounts receivable back-ends. The guts of hydrologic engineering is essentially an OR application.
Arnold Allen was the principle OR guy for the computer performance evaluation (CPE) discipline.]
https://en.wikipedia.org/wiki/Arnold_Allen
“Arnold Oral Allen was an American instructor, public speaker, and writer who worked at IBM and Hewlett-Packard, and specialized in the analysis and mathematical modelling of computer performance. ..”
Ron:
I cost modeled plastic, rubber, and stampings. The discussion is usually not related to price although in the end I suggest a price. I talk the cost of each operation with regard to material, overhead, and labor. I already know the cycle times, mold time, stamps per minute, press size, and the allocation of manpower per press. My cost saves were based on reality and a partner ship with the supplier mosyly.
SAP sucks, I liked MAPICS and the Japanese 3.2. I was a god
(Both the Debt and the GDP are just numbers, however.)
The federal debt is on track to outpace US economy in 2021, budget office says
NY Times – September 2
The amount of U.S. government debt will nearly outpace the size of the nation’s economy in the 2020 fiscal year, the Congressional Budget Office said on Wednesday, a level not reached since the immediate aftermath of World War II and a direct result of the pandemic recession.
The federal budget deficit is expected to reach $3.3 trillion for the fiscal year, which ends on Sept. 30, the budget office said. Total debt held by the public is expected to reach an estimated 98 percent of the size of the economy — gross domestic product — for the year. It falls just short of equaling the size of the economy: The last fiscal year when the amount of federal debt was larger than the sum of the nation’s annual economic output was in 1946.
The budget office now expects the debt to exceed the size of the economy in fiscal year 2021. By 2023, it said on Wednesday, it expects the debt as a share of the economy to reach its highest level in American history, surpassing the World War II era. …
@Run,
I got a buddy that contracted on AS/400 platforms using BPCS (which I may not even spell correctly) and he got crowded out by SAP demand. Then he made a series of bad decisions and now in his sixties is doing blue collar odd jobs.
I did contract work in 73-74 on IBM mainframe Assembler and various platforms (Honeywell, IBM, Unisys and Burroughs) for COBOL applications. To contract you must have the skills that are in demand regardless of all else. My customers raved about me and I was on a fast track up with a small local firm that was undergoing big changes in management after being sold to Life of Virginia just before they hired me. I smelled trouble and bailed. I had a job for decades longer than that employer had a firm. My nose for trouble has never lied to me. I have left a trail of wastelands behind in my career until I found a lasting opportunity which I stuck to like glue until the end.
I never worked retail order entry or even back-end. I also never got stuck with payroll, so there is that. in applications I did life insurance policy issue, actuarial, and in-house online policy holder service (no self service in those days), and health claims adjustment and some back-end banking. When I finally made it out of the FIRE sector and into distribution it was as a systems programmer maintaining the OS on a mid-range IBM.
Then I got a DASD management and performance analysis job on the big iron for the state of VA in 1980 and it was a godsend. In 1984 I moved up to capacity planning with only analytic rather than admin performance management role and I never applied for another position over the next 31 years.
@Run,
“…I was a god”
[I somewhat relate, but being raised an only child then peer praise does not adequately compensate for peer nuisance. I am possibly the only person in the US that is actually enjoying the peace and quiet of the global pandemic. I love the outdoors except for the Fen deer that eat my roses and I love the solitude. After I feed my work from home wife then i get outside as fast as I can, except when the heat index goes well above 100F, like today. But summer is almost gone and I have a lot to do today, so I am going to suck it up and get my shirt wet with sweat. I have not missed my job for minute since getting laid off into retirement. }