Home > Economics - General > Dark Matter

Dark Matter

December 22nd, 2005

Over the fold, my column in today’s Fin, which deals with the latest “don’t worry, be happy” theory on the US (but not Australian) current account deficit.

A dark matter of deficits

AFR 22/12

Given the unwillingness of the Bush Administration to offer any policy response to the massive growth in US budget and current account deficits, it is not surprising to observe a steady stream of theories explaining that such deficits can be sustained indefinitely.

The latest put forward by Ricardo Hausmann and Fredrico Sturzenegger of the Kennedy School of Government at Harvard, uses the catchy idea of ‘dark matter’, a reference to the unseen matter cosmologists believe is necessary to explain the observed properties of the universe.

Such hypothetical forms of matter have a patchy history. Successes include the prediction, by the Big Bang theory, of the cosmic microwave background radiation, discovered in 1963. In the eighteenth century, on the other hand, physicists posited the existence of a substance called phlogiston, with negative mass, suppose to be emitted in the process of combustion. In reality, substances gained mass during combustion because they combined with oxygen.

Another hypothetical substance was the luminiferous ether of the 19th century supposed to carry light waves. Einstein’s theory of relativity eliminated any need for the ether and the idea has been discarded.

Hausmann and Sturzenegger use the idea of dark matter in a couple of ways. The first (fairly uncontroversial) is to argue that while the official accounts show that the US is a large net debtor, the fact that the income account has shown a small surplus for most of the past two decades suggests that the value of US assets overseas is understated. The unmeasured excess is referred to as dark matter.

The second idea is to argue that, since the income balance has been roughly stable over the past five years, the massive trade deficits of that period must have been offset by steadily increasing exports of dark matter, totalling around $3 trillion. Hausmann and Sturzenegger suggest that this dark matter consists of such things as seignorage on US currency, the expertise embodied in operations like EuroDisney and the capacity of the US to provide implicit insurance services.

Something like this must be true if it is assumed that the willingness of foreign lenders to support the trade deficit is the rational outcome of efficient markets. In this sense, the ‘dark matter’ hypothesis is very like phlogiston. No-one would believe in its existence if it were not necessary to make the theory work.

In 1999, after all, the US economy was riding high. The dotcom mania was in full swing and a stream of books promised a golden future, with an unending boom and the Dow rising to 36 000. The US government had balanced its books and was projecting a surplus of $US5 trillion over the period to 2010.

Is it really plausible that the last five years, with the collapse of the dotcom boom, the emergence of chronic government budget deficits and weak employment growth have increased international faith in the US to the tune of $3 trillion, as claimed by Hausmann and Sturzenegger?

There have been some important positive developments in the US economy in this period, such as strong growth in output per hour. But this ought to have led to an inflow of equity capital. In fact, foreign investors have generally withdrawn equity capital from the US in this period.

There are some technical difficulties with the ‘dark matter’ analysis. A crucial analytical assumption is that assets should be valued according to the average value of the returns they generate. In fact, however, the riskiness of returns is equally important. The visible transactions in the national accounts show that the US has built up a large stock of short-term debt, which offers relatively low risk in the absence of an exchange rate collapse. By contrast, the putative dark matter is illiquid and almost certainly highly risky.

The real problem though is that Hausmann and Sturzenegger overlook the obvious explanation for the recent strength of the US income balance. For most of the period since 2000, US interest rates have been exceptionally low. Given the importance of short-term debt, this obviously improved the balance temporarily. As interest rates have risen, however, the income balance has turned negative, and this trend will accelerate as debt is rolled over.

One final point. If the sustainability of the US current account deficit is explained by ‘dark matter’ what does this say for Australia? It’s hard to believe that we share the supposedly unique capacity of the US for seignorage, insurance and so on. The ‘dark matter’ hypothesis actually makes Australia’s chronic deficits look less sustainable.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.

Categories: Economics - General Tags:
  1. Ray
    December 22nd, 2005 at 14:58 | #1

    It’s like most things, the US current account will matter when markets say it does. There have been a lot of epitaphs written for countries with seemingly “unsustainable” deficits, but they can go on in that condition for a long time. The dismal scientists do get their one day in the sun, whilst currency dealers get a sun tan by treating the currencies on their day-to-day merits. Even The Economist admitted a few weeks ago that selling US dollars on the basis of an eventual current account-related adjustment would have seen you lose a lot of money.

  2. Andrew
    December 23rd, 2005 at 06:45 | #2

    ..the luminiferous ether of the 19th century supposed to carry light waves. Einstein’s theory of relativity eliminated any need for the ether..

    I thought it was Maxwell’s maths on electromagnetism that showed there was no need for a medium for light to travel in (ie the ether).

  3. wilful
    December 23rd, 2005 at 08:04 | #3

    I fear that in ten or one hundred years, when economics history books are being written, they will say “how could they have been so blind?”.

  4. Ian Gould
    December 23rd, 2005 at 08:24 | #4

    “Even The Economist admitted a few weeks ago that selling US dollars on the basis of an eventual current account-related adjustment would have seen you lose a lot of money.”

    Actually over the last few years borrowing in the US and investing the money in Euro- or Pound- denominated debt securities would have been quite lucrative.

    I don’t know if there is such a thing but a euro-denominated gold-loan fund would have been a fantastic investemnt over the last year.

  5. Terje Petersen
    December 23rd, 2005 at 09:56 | #5

    I thought it was Maxwell’s maths on electromagnetism that showed there was no need for a medium for light to travel in (ie the ether).

    Yes that was my understanding also.

  6. craigm
    December 23rd, 2005 at 10:47 | #6

    Terje

    Finally a post where you can be justified in banging on about a gold standard and yet you choose to focus on a throwaway.

  7. Terje Petersen
    December 23rd, 2005 at 11:12 | #7

    Craigm,

    Finally somebody that thinks a gold standard can be justified and they want me to do all the heavy lifting.

    Regards,
    Terje.

  8. Terje Petersen
    December 23rd, 2005 at 11:47 | #8

    Quote Jude Wanniski:-

    For the entire 19th century up to World War I, the U.S. ran a trade deficit with the ROW in almost every single year and yet the US dollar/gold price was constant at $20.67 oz – except for the Civil War period when the government “floated� the dollar.

    REFERENCE: http://wanniski.com/PrintPage.asp?TextID=4002

  9. Terje Petersen
    December 23rd, 2005 at 12:34 | #9

    ROW = rest of world

  10. SJ
    December 23rd, 2005 at 13:38 | #10

    Andrew says:

    I thought it was Maxwell’s maths on electromagnetism that showed there was no need for a medium for light to travel in (ie the ether).

    I’ll take care or the “throw away”.

    Maxwell believed in the ether. To quote big Al himself

    The development of the theory of electricity along the path opened up by Maxwell and Lorentz gave the development of our ideas concerning the ether quite a peculiar and unexpected turn. For Maxwell himself the ether indeed still had properties which were purely mechanical, although of a much more complicated kind than the mechanical properties of tangible solid bodies. But neither Maxwell nor his followers succeeded in elaborating a mechanical model for the ether which might furnish a satisfactory mechanical interpretation of Maxwell’s laws of the electro-magnetic field. The laws were clear and simple, the mechanical interpretations clumsy and contradictory. Almost imperceptibly the theoretical physicists adapted themselves to a situation which, from the standpoint of their mechanical programme, was very depressing. They were particularly influenced by the electro-dynamical investigations of Heinrich Hertz. For whereas they previously had required of a conclusive theory that it should content itself with the fundamental concepts which belong exclusively to mechanics (e.g. densities, velocities, deformations, stresses) they gradually accustomed themselves to admitting electric and magnetic force as fundamental concepts side by side with those of mechanics, without requiring a mechanical interpretation for them. Thus the purely mechanical view of nature was gradually abandoned. But this change led to a fundamental dualism which in the long-run was insupportable. A way of escape was now sought in the reverse direction, by reducing the principles of mechanics to those of electricity, and this especially as confidence in the strict validity of the equations of Newton’s mechanics was shaken by the experiments with b-rays and rapid kathode rays.

    Maxwell published in 1864. The “>Michelson-Morley experiment of 1887 failed to detect the ether. It was Einstein’s special theory of 1905 that discarded the ether as a reference frame.

  11. December 23rd, 2005 at 13:39 | #11

    Terje, during the 19th century the USA soaked up a lot of foreign investment – not debt – which was largely wiped out by the operation of democracy.changing the rules when things didn’t work out favourably to the locals (see the Income Bonds following railroad reorganisation, and the way small farmers received preference over foreign landowners despite their undercapitalisation which forced them into dependency on US banks). In fact, contrary to received US opinion today, the USA then had a very bad credit rating because of this high sovereign risk (see Trollope’s “North America”). Nevertheless, the USA kept mopping up foreign savings which were being generated in excess (see Keynes’s introcutory material in “The Economic Consequences of the Peace”). It has been estimated that the USA received far more wealth transfer from Europe than it ever gave back in the form of Marshall Aid after 1945.

    Today’s US attitudes to repudiation of debts etc. is just a case of “the devil is ill, the devil a saint would be; the devil is well, the devil a devil is he”.

  12. SJ
    December 23rd, 2005 at 13:40 | #12
  13. Terje Petersen
    December 23rd, 2005 at 14:03 | #13

    Terje, during the 19th century the USA soaked up a lot of foreign investment – not debt

    I presume you mean that foreigners took an equity stake in US assets. I would think that a debt position is only marginally different. I certainly think of the bank having equity in my house even though it is actually just a debt that I owe the bank.

  14. SJ
    December 23rd, 2005 at 14:19 | #14

    Terje says:

    I certainly think of the bank having equity in my house even though it is actually just a debt that I owe the bank.

    Like your thinking on the ether, this is simply wrong.

  15. Terje Petersen
    December 23rd, 2005 at 15:00 | #15

    SJ,

    Clearly a simile is too complex for you. Although given your attitude of late I think you are just looking for any opening that allows you to say “you’re wrong!”. Obviously you have not allowed the spirit of Christmas to cloud your mind.

    My comment that you quote (in isolation) is not “simply wrong”, it is “technically wrong”. However there are a lot of similarities between debt and equity, just as there are obvious differences.

    If the similarities did not exist then Islamic banking wouldn’t work.

    Perhaps you might explain the significance of the differences in the context of the US current account deficit.

    Regards,
    Terje.

    P.S. Merry Christmas SJ. I hope it is devoid of Metaphors such that you may avoid confusion.

  16. SJ
    December 23rd, 2005 at 15:23 | #16

    Terje, it would serve you better to look back at P.M. Lawrence’s post, and try to work out why he drew the distiction between “foreign investment” and “debt”.

    A response like yours, which essentially attempts to rebut Lawrence by claiming that there’s no difference, is kinda worthless.

    I understand that your training is in engineering, not economics. So I guess it’s forgiveable that you don’t understand economics very well. I do think it’s funny that John knows more about physics than you do, however.

    Merry Christmas to you, too. And P.S., when people frequently tell you that you’re wrong, you should at least consider the possibility, you know, that you’re frequently wrong.

  17. Terje Petersen
    December 23rd, 2005 at 16:03 | #17

    SJ,

    Perhaps you missed the inquisitive tone in my response to PML. For instance I said “I would think…“, in order to make clear that I was not denouncing his assertion but rather trying to understand it.

    You’re wrong to characterise my comment to PML as a rebutal. It was no such thing.

    And P.S., when people frequently tell you that you’re wrong, you should at least consider the possibility, you know, that you’re frequently wrong.

    I have never denied the possibility that I could be wrong. In fact I work very hard to remain open to that possibility.

    If I was closed to the notion that I might be wrong I would not devote time to discussion sites where there are lots of people who disagree with me.

    With regards to Andrews comments about Maxwell I said “Yes that was my understanding also”. Again my choice of words should make it clear that I was quite open to being wrong. I am satisfied that my understanding of Maxwells position was flawed. So thankyou for clearing it up. I am most grateful (and humbled) to be in the presence of somebody as knowledgable about Maxwell as your kind self.

    If you’re suggesting that I should be fearful of being wrong then I disagree. Maybe if I was playing with an electrical circuit or mixing chemicals I might be fearful of a mistake. However in social discourse my experience is that being wrong is not the end of the world.

    Regards,
    Terje.

    P.S.

    QUOTE: “I have learnt more from my failures than my successes.”

  18. Terje Petersen
    December 23rd, 2005 at 16:27 | #18

    Just to be really clear.

    Terje, during the 19th century the USA soaked up a lot of foreign investment – not debt

    PML,

    I can not discern why you think the distinction between debt and equity is important in this context. Can you please expand on this point.

    Regards,
    Terje.

  19. Will De Vere
    December 23rd, 2005 at 21:07 | #19

    God, I miss the Gold Standard, I miss it so much, even if it is only a superstitious relic (Keynes). Every little child on Christmas morning, when they see the tree and all the presents, understands the Gold Standard.

    Bring back bullion. Then every year will have a Christmas.

    (Did JM Keymes,
    Cheat on his exans?

    Does being on a Blog
    Release my rabid dog?)

  20. Andrew
    December 23rd, 2005 at 21:35 | #20

    Thanks for the reply SJ. However, after reading it, I still get the distinct impression that though Maxwell still believed in the ether, his mathematics proved it unnecessary.

    That he was unwilling to take on the implications doesn’t really matter.

    Really, the only thing that teed me off (slightly) is that all things good in physics have a tendency to be laid at Einstein’s feet. Great though he was, there was plenty of intellectual firepower around before him and they all end up being downplayed.

    And to forestall any comments about the off-topicality, I say this about the US economy. Buy yuan.

  21. SJ
    December 23rd, 2005 at 22:08 | #21

    No probs, Andrew.

    Maxwell’s mathematics didn’t prove that the ether was unnecessary. They threw a spanner works, which caused people to question Gallilean relativity.

    The equations for time dilation, length contraction etc., are actually due to Lorentz, not Einstein. However:

    While Lorentz suggested the Lorentz transformation equations, Einstein’s contribution was, inter alia, to derive these equations from a more fundamental theory, a theory which did not require the presence of an aether. Einstein wanted to know what was invariant (the same) for all observers. Under Special Relativity, the seemingly complex transformations of Lorentz and Fitzgerald derived cleanly from simple geometry and the Pythagorean theorem. The original title for his theory was (translated from German) “Theory of Invariants”. It was Max Planck who suggested the term “relativity” to highlight the notion of transforming the laws of physics between observers moving relative to one another.

    Einstein is highly regarded, but most people don’t understand the real reason. It’s not for special relativity, which would have been worked out with or without Einstein’s help. Einstein’s great contribution was general relativity, in 1915.

  22. SJ
    December 23rd, 2005 at 22:44 | #22

    It’s not for special relativity, which would have been worked out with or without Einstein’s help.

    I should offer some evidence for this assertion. Henri Poincare almost (and arguably did) beat Einstein to the punch:

    In 1898 in “The Measure of Time� he formulated the Principle of relativity, according to which no mechanical or electromagnetic experiment can discriminate between a state of uniform motion and a state of rest. In collaboration with the Dutch theorist Hendrik Lorentz he went on to push the physics of the time to the limit to explain the behaviour of fast moving electrons as well as the failure of experiments to detect motion relative to the ether. He published the main features of special relativity before Einstein, and even introduced the 4-space notation that Hermann Minkowski became known for. It was Albert Einstein however, who first showed how the Lorentz transformations can be derived from a minimal number of assumptions and it is Einstein who is generally regarded as having produced the successful new Special relativity model. There is a growing minority opinion that Poincare deserves more credit for the development of Special Relativity than he has been given to date.

  23. Terje Petersen
    December 24th, 2005 at 05:52 | #23

    God, I miss the Gold Standard, I miss it so much, even if it is only a superstitious relic (Keynes). Every little child on Christmas morning, when they see the tree and all the presents, understands the Gold Standard.

    Occassionally around Christmas time people still give gold coins to Charity. The salvation army in Sydney get given them every few years.

    http://news.google.com.au/news?hl=en&ned=&q=salvation+army+gold+coin

    The thing I find neat about the gold starndard in Australia is that when we went metric we really went metric. The Australian Dollar when introduced in 1966 was worth 1 gram of gold. Its worth about 45 milligrams today.

  24. Mike Hart
    December 24th, 2005 at 07:40 | #24

    Dark Matter? Yet another paradigm shift? I think not. A poor explanation for the obvious, just as the monarchs of the sixteenth and seventeenth centuries found it expedient to run deficits and then debase the coinage to pay for those excess, so to in time will it be found that derivatives and the various forms of new money have had the same effect. A return to the gold standard would simply bring the whole world to a shuddering halt immediately as the simple math of the multiplier would quickly reveal that the money we take as wealth is all simply mutlply tiered created money aka debt. From my view creating money like this is no different to reducing the amount of gold in a coin with say copper, same result, there is still originally only so much gold or wealth to go around.

    The core problem is central banks relieving first tier banks from holding large reserves, then allowing the non banking sectors and business to create money without any real control. The nightmare which is to come is visible in the sheer liquidity that is sloshing around the world, low interest rates and huge mortgages are merely symptomatic, trouble is that this liquidity and the rampant real inflationary effects are not being measured correctly anymore because of the distorted Price signals taken by policy makers via M1, M2,M3 and CPI (trying putting back debt or stocks as part of CPI and see what happens to your inflation rate). Everybody has become comfortable with money as a commodity and it being produced or held in basically any form you like, so the deception that you can ignore economic fundementals continues. Even retailers are effectively marketing money as a commodity, although they attach a good to it to establish some value in the transaction.

    We can keep the whole game going forever providing that foreign capital is prepared to give us their surplus, we can comfortably live with very large current account deficits forever probably well until the one of those unforseen events allows the multiplier to work in reverse. But until then virtuous government will shift debt to the private sector and the public, the Americans will devalue their currency again to forestall the inevitable, and superannuation and pension funds will keep a floor under the whole edifice until such time as redemptions are greater than inflows and people have a need to redeem the ‘new’ wealth’. The internal versus external balance essentially vanished with the acceptance of globilisation, problem is there is no global central bank to keep it working in any form of prudent manner. So the great public and business involvement in the speculation with money as a commodity continues unabated. Think about it – why are the foreign currency speculators and hedge funds relatively quiet and the long term bond markets in the doldrums. They have called it correctly me thinks.

    Anyway we can relax, these are long run issues and as Keynes said in the long run your dead.

    Merry Xmas All.

  25. Dogz
    December 24th, 2005 at 09:10 | #25

    People invest in the US because it is by far the most dynamic economy on earth.

    Europe is sclerotic, the result of being run by academics and bureacrats who for the large part have never held a real job or created any wealth. Britain manages to distance itself from many of Europe’s problems, but still suffers from Eurpoean drag, and that perennial negative outlook of the “pommie whingers”.

    Australia is better, but we’re still little more than the world’s mine. At least we’re in the process of rolling back the influence of bureacrats and academics, which should ensure continued prosperity. Long may Howard reign.

    Asia is getting there. The Chinese are at least as entrepreneurial as the Americans, but I doubt they will ever be as creative. It’s not in their culture.

    China will keep propping up the US dollar until not doing so has a negligible effect on their economy. Presumably that will be when the Chinese domestic economy is some sizable fraction of the US economy. I give it 10 or 15 years.

  26. Ian Gould
    December 24th, 2005 at 10:51 | #26

    >People invest in the US because it is by far the most dynamic economy on earth.

    >Europe is sclerotic, the result of being run by academics and bureacrats

    Average per capita GDP growth in the US in recent years has been 1.6% per year, average per capita GDP growth in the EU in recent years has been 1.5%.

    The “dynamsm” of the US economy is almost entirely explained by high net population growth largely due to higher immigration (legal and illegal).

    That’s based on figures in an Economist article I quoted and linked to in one of the recent “week-end reflections” or “Monday observations” but which I can no longer find on the Economic site.

    This US government report provides similar figures:

    http://www.bls.gov/fls/flsgdp.pdf

    For the period 1980 to 2004, Australia, Japan, Norway and the UK all matched or exceeded the real rate of per capita GDP growth for the US.

    >Asia is getting there. The Chinese are at least as entrepreneurial as the Americans, but I doubt they will ever be as creative. It’s not in their culture.

    That’s a staggeringly foolish and patronising comment.

  27. December 24th, 2005 at 11:37 | #27

    This is a hilarious personal coincidence for me — I was just reading about dark matter theory on wikipedia this week out of general interest, and reflecting on how it is an ‘ether’ theory to try to explain observed large-scale gravitational anomalies. See also the theoretical revision of ‘F = ma’ as an alternative attempt to explain the strange behaviour of galaxies in rotation.

    In conjunction with the US current account deficit and what happens when a country is run by robber barons and self-serving elites. Even more impetus on their part to try to drive home the military possession of parts of the Middle East — how do you get out of a current account crisis? — appropriate a new chunk of resources on the cheap somewhere by neo-colonial imperialism, dressed up with a lot of propaganda to make it palatable at home. Change the petrocurrency of said country back to the US dollar from the Euro in order to further artificially prop up the currency — isn’t it called robbing Peter to pay Paul, and depriving a country of its sovereign rights to trade in whatever currency it desires and with whatever countries it desires? The more trouble the US is in, the more determined it will be to see this agenda through, the more recent history will be reinvented, and the more intricate spin and propaganda will be written and presented to the gullible masses to enable them to continue living beyond their means. It’s just like 1984 newspeak and doublethink, except the peasantry aren’t deliberately kept in poverty, the result is intended to be more like the conventional wars of acquisition throughout history.

    I’m never sure about the gold standard… I assume the argument is that a country must have mined or acquired financially a whole pile of gold as some sort of fairly unwavering economically valuable substance to back up its issue of currency. I assume it then is intended to stop free-floating build-ups of credit that can’t be sustained or met when called in to account.

    > Mike Hart Says: trying putting back debt or stocks as part of CPI and see what happens to your inflation rate.

    Yes indeed, well said. Similar remarks on using ‘GDP growth’ as some sort of proxy measure of the wellbeing of the country and its people — or true economic growth vs empty inflation from internal speculative booms.

  28. December 25th, 2005 at 00:43 | #28

    Terje, I drew the debt/investment distinction for two reasons. The first is that that was mostly how things were handled then; by itself that wouldn’t have made much difference, as you picked up on.

    But the second reason is that foreign interests in the USA were eroded by subterfuges, and one of these related to whether dividends were paid. At the end of the 19th century Bertrand Russell was struck by how US enterprises that were technically bankrupt seemed to be outwardly more prosperous than sound ones, being larger and having equipment in better condition and so on. The finagle was via legal forms, like trusts; technically firms were so indebted in a round robin that owners of record never got anything back. And there were many other tricks (like the income bonds I mentioned).

  29. Dogz
    December 26th, 2005 at 06:18 | #29

    Average per capita GDP growth in the US in recent years has been 1.6% per year, average per capita GDP growth in the EU in recent years has been 1.5%.

    You forgot to add: almost all per capita GDP growth in the EU is coming from the new eastern-block additions. You know, the ones that have employed all those policies so popular with the left, eg flat income taxes (sarcasm alert). With such a large influx of ex-commie countries, your statistics are only remarkable for how low Europe’s growth has been overall. US has GDP per capita (in $US) of $40,100 (est). EU as a whole is $26,900. Even off such a low base US growth is outstripping the EU. Victory for the socialists and bureaucrats (sarcasm alert again).

    The “dynamsm� of the US economy is almost entirely explained by high net population growth largely due to higher immigration (legal and illegal).

    To use your hubris Ian, that’s one of the most staggeringly foolish things I have ever read. US dynamism is explained first-and-foremost by US culture. Unlike the French bureaucrats, for example, who shove their poor immigrants in welfare-state bunkers to rot for generations, US immigrants are fed into a culture that gives everyone an opportunity and everyone a foot on the bottom rung. A culture that believes in opportunity. Go live and work there (a real job, not some govt or academic junket) for a while Ian, you’ll see what I mean.

    And I’ll take a bet on the Chinese. $100,000 says that even when their economy is as large as the US, they won’t be as creative. That’s not patronizing – it is just a product of their more top-down, hierarchical culture.

  30. avaroo
    December 27th, 2005 at 05:40 | #30

    “Europe is sclerotic, the result of being run by academics and bureacrats who for the large part have never held a real job or created any wealth. ”

    I’d say it’s more the bureaucrats, who protect their turf at the expense of everyone else. Europe is a “Have” vs “Have not” place. You’re born into one of these and you don’t get out

    “Britain manages to distance itself from many of Europe’s problems, but still suffers from Eurpoean drag, and that perennial negative outlook of the “pommie whingersâ€?.”

    Britain can thank Mrs. Thatcher for keeping Britain our of the illness that currently infects the former economic powerhouses, Germany and France.

  31. avaroo
    December 27th, 2005 at 05:50 | #31

    “It’s like most things, the US current account will matter when markets say it does.”

    Excellent point, Ray. Do you have any ideas as to why the markets have so far said the US current account doesn’t matter?

    “There have been a lot of epitaphs written for countries with seemingly “unsustainableâ€? deficits, but they can go on in that condition for a long time.”

    The epitaph for the US is written daily, economically, politically, on matters of faith, education, medicine. Yet, here we are.

    “Even The Economist admitted a few weeks ago that selling US dollars on the basis of an eventual current account-related adjustment would have seen you lose a lot of money.”

    which may be why the markets haven’t yet written us off.

  32. Terje Petersen
    December 27th, 2005 at 13:09 | #32

    A return to the gold standard would simply bring the whole world to a shuddering halt immediately as the simple math of the multiplier would quickly reveal that the money we take as wealth is all simply mutlply tiered created money aka debt.

    This may happen if there was a move to make fractional reserve banking illegal. However such a move has nothing to do with introducing a gold standard.

  33. Terje Petersen
    December 27th, 2005 at 13:13 | #33

    But the second reason is that foreign interests in the USA were eroded by subterfuges, and one of these related to whether dividends were paid.

    PML,

    Are you implying that legal forms as they relate to current US debt could not be manipulated in the same manner as 19th century foreign equity?

    I would guess that the political and legal risks for foreigners under a debt model are little better than under an equity model.

    It is still not clear to me whether you think the situation today is better for the USA, less prone to a painful correction or somehow different in terms of moral hazards.

    Regards,
    Terje.

  34. December 27th, 2005 at 13:24 | #34

    Terje, all I was doing was point out the things actually done and how. I wasn’t trying to say anything else about today and what could be done today, so don’t try to read too much into it.

    For what it’s worth, I do think the USA is a huge source of sovereign risk, today as well as in the past, but that small players needn’t worry for so long as it suits the USA not to change for everybody; a bit like small fish swimming in and out of a crocodile’s open jaws. Or people can use the system that works on crooked roulette wheels, make small bets against the rest of the players so as to piggyback on the house (who won’t give them away for fear of scaring the other punters).

    It comes down to democracies failing to get ethical values but rather to start listening to themselves, groupthink. The USA is today’s major victim and culprit, but it isn’t a peculiarly US thing.

  35. SJ
    December 27th, 2005 at 16:30 | #35

    Dogz Says:

    You forgot to add: almost all per capita GDP growth in the EU is coming from the new eastern-block additions.

    You know, like France, which averaged 1.9% for the past 5 years.

    Next time, bring numbers, not nonsense.

  36. Dogz
    December 27th, 2005 at 17:55 | #36

    You know, like France, which averaged 1.9% for the past 5 years.

    Next time, bring numbers, not nonsense.

    http://www.nationmaster.com/graph-T/eco_gdp_rea_gro_rat&b_map=1

    (click on Europe)

    Next time, don’t even bother posting.

  37. SJ
    December 27th, 2005 at 18:43 | #37

    Your number (1.1%), for a single year (2002), from exactly the same source I used (CIA factbook), proves what, exactly?

    Did they cover statistics at all in that degree you claimed to have done?

  38. Ian Gould
    December 27th, 2005 at 18:58 | #38

    >You forgot to add: almost all per capita GDP growth in the EU is coming from the new eastern-block additions.

    The figures I quote are for the period 1980-2004 and are for individual EU member-states (none of them from Eastern Europe).

    Considering that the countries you refer to only joined the EU two years ago, I’d suggest it’s “hubris” to invoke them in this context.

  39. Ian Gould
    December 27th, 2005 at 19:44 | #39

    Maybe we’re looking at the wrong measure of dynamism.

    Let’s look at the real PPP GDP per capita of variosu countries as a percentage of the US real GDP per capita. (Refer to page 12 of the document I linekd to earlier)

    Since 1960, France has gone from 58.1% of US GDP per capita to 89%.

    In the same period the UK grew from 66.7% to 78.8%.

    Canada actually went backwards from 84% of US real GDP per capita to 77.3%.

    Let’s see, let’ take a look at some of those other sclerotic stagnant European economies,

    Italy 51.5% to 79%.

    Hey wait a minute, the two continental economies grew FASTER than Canada or the UK. So much for the superiority of “anglo-saxon capitalism”.

    Maybe, the Euros grew faster because in 1960 they were still recovering from World War II.

    Let’s test it by looking at Sweden a WWII neutral: 1960: 61.3%; 2004 78.8%. Boy that featherbedding socialist welfare state sure killed their economic development. I mean, sure like Italy and France they grew faster than the UK and caught up with and passed the UK real capita GDP but the margin of out-performance was significantly lower.

    That can’t be right, these darn facts just have respect for people’s ideology.

  40. Ian Gould
    December 27th, 2005 at 19:48 | #40

    Actually I misread the 2004 figure for Sweden it should be 76.1. So in fact England is still slightly ahead of Sweden on this measure – but by substantially less than in 1960.

  41. Steve chidio
    December 27th, 2005 at 22:15 | #41

    Dogz

    I have to agree with Ian Gould on this. Indeed France in particular has proven to be an economic engine that is so well tuned it simply defies imagination. Unemployment has become a lifestyle choice not because there are too few jobs but because people have simply chosen not to work as they pursue other more interesting activities. It is multiculturalism at its best.

    One other thing/
    Top down command type economies work best as efficiencies of scale are allowed to combine without the interruption of competition. That’s why we need a strong dose of industrial planning in this country along the lines of what is happening in China. Sure, class A stocks on the Shanghai stock market are not performing anywhere near their full potential. But why is stock market performance a good indicator of economic fortunes down the road anyway. If like China, our Government followed an appropriate industrial policy with directed lending policies in the banking sector we could easily grow at 10 % per annum without much difficulty. Such a policy mix would allow us to have our cake and eat it too.
    Enough of this Anglo-Saxon model! We need a planned approach to the economy in order to allow for competing interests. The sooner we move in that direction the better. Firstly, however, we need to solve the problems of this notional democracy we live. That’s for another day.

    Thanks for pointing all this out before I did, Ian G. You’re spot on when it comes to which is better the command approach or the inflexible, difficult to understand Anglo- Saxon model.
    I also afraid your links do not disclose the real benefits that can be derived by applying the European model as Ian Gould so gratiously explained to you. I hope this settles it.

  42. Dogz
    December 28th, 2005 at 06:27 | #42

    SJ, click on Europe in the world map at that link. Blue is slower growth, green is faster growth. Almost all the faster growth is in the new eastern-block countries.

    Ian, “1980-2004″ is not “recent years”. The Berlin wall fell in that period. The common currncy was introduced. An entire generation of Europeans have grown up and become productive members of the economy in that time (well, about 50% of a generation in the case of the old European countries :) . Averaging over that entire period tells you very little. Gotta love the economist’s penchant for drawing strong conclusions from meaningless averages.

    Steve chidio, I thought for a minute you were being sarcastic, but apprently you are serious. You’re also dead wrong. Start with China: their economy started to grow rapidly precisely when they started to move from command to free-markets.

    As it stands today, US GDP per capita is 50% greater than in France and Germany. That’s about US$13,000 per person per year. That’s an awful lot of extra money sloshing around. The impact of that money is obvious if you spend time in the US. So much better infrastructure, roads, education, larger houses, purchasing power, etc.

  43. Ian Gould
    December 28th, 2005 at 07:37 | #43

    >As it stands today, US GDP per capita is 50% greater than in France and Germany. That’s about US$13,000 per person per year.

    Ever hear of the concept of purchasing power parity.

    I’ll refer you AGAIN to the BLS document which shows in the years 2001, 2002, 2003 that in ever single one of those years some individual “Old Europe” countries grew faster than the US.

    Ay this point I expect you to argue that US growth in that period was depressed by the Tech Wreck, meaning that you refuse to accept either recent or long term trend data which fails to support your beliefs.

    I’m sure the citizens of New Orleans are suitability impressed with the state of US infrastructure.

  44. Ian Gould
    December 28th, 2005 at 07:45 | #44

    Steve, I’m no fan of the command economy – it’s just that I see little evidence of Steve’s claimed “US dynamism” outside of its immigration policy. The lesson I take from international comparisons of tax levels, levels of government economic intervention and economic growth is that tzx and spending levels and government regulation have surpirsingly little effect either way.

    Peopel also fail to understand that Europe is in fact undergoing quite radical economic reform including reductions in payments under the Common Agricultural Policy and cuts to tariffs as well as increased competition and economic integration within the Eurozone.

    Not to offend further against Dogz religious beliefs (“There is no God but the market and Milton Friedman is his prophet”) but the high unemployment in France and Germany pointed to as evidence of economic inefficiency is largely the result of economic reform.

    As noted in the Economist article I cited earlier there’s been a massive growth in labor market participation in Europe in the past decade as governments reduced retirement benefits, increased consumer contirubtions to medical costs and made it harder to retire early.

  45. Dogz
    December 28th, 2005 at 08:19 | #45

    Ever hear of the concept of purchasing power parity.

    Yes Ian, I have. Per capita GDP (PPP) in international dollars (2004):

    US: 42,367
    France: 27,738

    42,367 = 1.527 * 27,738

    So, in fact, the US is 52.7% ahead of France per capita. I was conservative with my 50% statement.

    I am sure the New Orleans citizens are about as impressed with the state of US infrastraucture as the citizens of Redfern are with the state of Australian infrastructure. Both groups have a large net negative economic impact in their respective countries.

    What’s it going to be Ian: judge a country’s economic performance by the average standard of living or the worst? Expectation analysis or worst-case? While the US certainly could do better in terms of its least well-off without reducing its economic performance, particularly on the healthcare front, most Western countries would be indistinguishable if you compared them based on the standard of living of their worst-off citizens. Not a very useful measure.

  46. Steve chidio
    December 28th, 2005 at 09:30 | #46

    Fully agree with you Ian, after all who wouldn’t. I am thankful a knowledgeable person such yourself understands that a command economy with one industrial policy is the future.

    Watch this Dogz charactor; next up he will be telling us Ronald Reagan turned the US around. Huh! Yea sure. Pull that other leg Dogz.

    As you rightly pointed out, there is no such thing as unemployment in France or Germany. There are only people who choose not to work as leisure is a far more interersting and simply just a facet of life.

    As Ian would agree, I’m sure, we need only one producer in one industry at a time supported of course by government fiat of a nationalized banking system. If the firm fails, support it, by giving the management another chance at success. Isn’t capitalism, after all, not accepting failure but only success.

    Dogz, Ian of course is doing the right thing. He is accurately presenting the fact that that US has at least 30% of its population living under the poverty line. Compare that to France where its close to zero. Why do you think that happens. Of course the reason is industry policy combined with a strong multicultural social system. The European economy works despite crude capitalist impuluses.

    Thanks for beinjg gentle in the face of a spurious attack, Ian. Dogz needs more time reading books.

  47. Mike Hart
    December 28th, 2005 at 09:41 | #47

    All this to and froing about GDP, I much prefer GPI as a measure, gives a very different picture about the state of various so called growth nations and the costs of our gllobal economic miracle. If your going to have a balance sheet approach to measurement then lets see what the liabilities are as well.

  48. Terje Petersen
    December 28th, 2005 at 14:16 | #48

    A definition of the “International Dollar” indicating how it is adjusted using purchasing power parities (PPP).
    http://en.wikipedia.org/wiki/International_dollar

    A list of countries ordered by GDP per capita in International Dollars (ie adjusted for PPP).
    http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita

    A small sample of the list:-

    Position/Country/GDP per capita (in ID)

    1 Luxembourg 63,609
    2 United States 42,367
    3 Norway 40,005
    4 Ireland 37,663
    8 Denmark 33,089
    13 Australia 29,893
    18 United Kingdom 28,938
    20 Sweden 28,205
    21 Italy 27,984
    22 France 27,738
    29 New Zealand 23,943
    97 China 5,642

  49. Ian Gould
    December 28th, 2005 at 15:26 | #49

    Dogz:

    Yes Ian, I have. Per capita GDP (PPP) in international dollars (2004):

    US: 42,367
    France: 27,738

    42,367 = 1.527 * 27,738

    So, in fact, the US is 52.7% ahead of France per capita. I was conservative with my 50% statement.

    Response, well I certainly accept your unsoruced figures over those of the US Government.

  50. Ian Gould
    December 28th, 2005 at 15:28 | #50

    Steve Chido: Fully agree with you Ian, after all who wouldn’t. I am thankful a knowledgeable person such yourself understands that a command economy with one industrial policy is the future.

    As you well know, i have never said anything of the sort.

    By the waty, how’s your campaign to deregulate the child prostitution and child ppornography industrries going?

  51. Dogz
    December 28th, 2005 at 15:43 | #51

    well I certainly accept your unsoruced figures over those of the US Government.

    My source is the same as Terje’s, which is wiki, which in turn quotes the CIA and IMF, both of which check out.

    Keep digging Ian, you’ll reach China soon (literally and metaphorically, or at least you’ll reach Mao’s China).

  52. Ian Gould
    December 28th, 2005 at 15:48 | #52

    Dogz: I am sure the New Orleans citizens are about as impressed with the state of US infrastraucture as the citizens of Redfern are with the state of Australian infrastructure.

    Funny, I don’t remember reading about any levees collapsing in edfern.

  53. Ian Gould
  54. Dogz
    December 28th, 2005 at 16:26 | #54

    Extracts – US – $39495; France – $27737

    That’s a 30% difference – not 50. Hopefully dogz is mroe careful in his calculations at work.

    Indeed I am: $39495 = 1.424 * $27737. So on those figures a 42.4% difference, not 30%. Dig Ian, dig.

    Something else for the leftie stagnationists in the audience: Janet Albrechtson in today’s Australian – another ripper:
    http://www.theaustralian.news.com.au/common/story_page/0,5744,17672971%255E32522,00.html

    Excerpt:

    And just to confirm that opposition aimed at Howard is too often unshackled by reason or evidence, the Howard haters have finished off the year with one of their old favourite taunts: Howard, the racist ringleader. When, after the Cronulla riots in Sydney, he refused to label Australians as inherently racist, it was just another example of “all sorts of dark shadows fall[ing] out of his mouth”, according to Richard Ackland. Howard is holding the lead of that “rancid old race dog”. Or, according to left-wing think tanker Clive Hamilton, Howard was whistling at us racist dogs. And let’s not forget Barns’s contribution: we are living in a pigsty with the PM winking and nodding to a racist populace.

    Dark shadows? Leads and dogs? Pigs? Winks and nods? Howard’s critics imagine he has some spooky Svengali-like influence over that dumb animal farm known as the Australian electorate. But, then, Howard haters are forced to talk down to voters rather than ‘fess up to the fact the PM may be on to something with policies based on empowering individuals to make their own decisions, thus neutering a whole swag of elites who would prefer to call the shots. No wonder his critics are becoming more feral every day.

  55. SJ
    December 28th, 2005 at 20:48 | #55

    Dogz Says:

    SJ, click on Europe in the world map at that link. Blue is slower growth, green is faster growth. Almost all the faster growth is in the new eastern-block countries.

    Oh my lord. So that’s your evidence that:

    People invest in the US because it is by far the most dynamic economy on earthz.

    Europe is sclerotic, the result of being run by academics and bureacrats who for the large part have never held a real job or created any wealth. Britain manages to distance itself from many of Europe’s problems, but still suffers from Eurpoean drag, and that perennial negative outlook of the “pommie whingers�.

    Do you realise that your proffered evidence shows both western Europe and the US “bottom” in the entire world?

    So what’s the story?

    Is there a problem with your assertion that “the US… is by far the most dynamic economy on earthz [sic]“? (Hint, yes there is)

    Is there a problem with your comparison between the US and western Europe? (Hint, yes there is)

    So tell me, why do you come here? It certainly isn’t to offer any wisdom or insight, and it’s doesn’t seem to be to learn.

  56. Dogz
    December 28th, 2005 at 22:08 | #56

    No SJ, that map was evidence in support of my asserion that most of the EU’s growth is coming from the new eastern-bloc additions. Go back and read the thread.

    If your economy is already extremely efficient, and you already have a GDP per capita 40%-50% above the EU, then it is unsurprising that you’re not going to grow that rapidly. You could use a similar argument for the lower growth in the old socialist Western European countries if they were at the top of the economic totem pole. But unfortunately they are not.

    So tell me, why do you come here? It certainly isn’t to offer any wisdom or insight, and it’s doesn’t seem to be to learn.

    I’m not hear to teach you anything SJ. It would be a waste of my time to try. You seem to have replaced reality with your idealized (but wrong) vision of humanity, and nothing I say or do will change that.

    But to answer your question: I come here primarily for sport.

  57. Dogs
    December 28th, 2005 at 22:49 | #57

    test

  58. Steve chidio
    December 28th, 2005 at 22:52 | #58

    Ian Gould.

    Sorry, my mistake I thought you favoured a planned economy. It certainly read like that. Anyway it seems you have some sympathy for my position anyway

    I don’t get your other comments. Please explain.

    Thanks

  59. Ian Gould
    December 28th, 2005 at 23:30 | #59

    >Indeed I am: $39495 = 1.424 * $27737. So on those figures a 42.4% difference, not 30%. Dig Ian, dig.

    The IMF figures have alreay been adjusted to PPP so the relevant calculation is actually $27737/$39495 which equals 70.23%.

  60. Ian Gould
    December 28th, 2005 at 23:39 | #60

    Steve, my view is pretty simple.

    When I find myself in a forum where people are attacking the US and rubbishing the idea of free trade, I take the contrary position.

    When I find myself in a forum where I think someone is exaggerating the relative economic performance of the US and bashing the Europeans unfairly, I take the contrary position.

    As I’ve said pretty much ad nauseum on various threads on this blog, I believe in a mixed market where most decisions about the allocation of resources are made through individual businesses and individuals trading in markets.

    Unlike some other posters here though, I don’t assume markets are always and invariably correct and I believe there is a role for government to intervene in soem areas of the economy.

    As an example, I believe there’s a role for government in setting a minimum wage. I’ve noted previously somewhere here that there’s no a priori reason to assume that the market-clearing rate for labor (i.e. the wage rate that would produce full employment) is equal to much less higher than the absolute minimum required for survival.

  61. Steve chidio
    December 29th, 2005 at 00:01 | #61

    Ian Gould
    It’s only a small step for someone like you to reach the conclusion that I have reached in that in a post industrial age we don’t need free markets in anything. The reason to me is quite simple. If one believes like we do that workers are exploited and therefore ipso facto open labor markets don’t work in a post-industrial age why have a market at all in other areas of the economy? Who needs it?
    As you would understand there is an inconsistency in the mixed economy theory. Labor markets should not (ever ) be free so why should any other market?
    By the way you really gave it good to the RWDB. Keep up the great work. You inspire us.

  62. Andrew Reynolds
    December 29th, 2005 at 01:53 | #62

    Hmmm – I think (or is that hope) that Steve chidio is Trolling – certainly reads that way.
    .
    Ian,
    Achieving high growth rates from a low base is not difficult. The path to reasonable success is already mapped out for you – you do not have the expense of taking blind alleys to deal with. The fact that France has not radically outperformed the US, coming from a lower base (whether 50% or 70%) even without the blind alley costs to me indicates that there is a problem.
    Most of the nations cited were, at one time or another, among the wealthiest on Earth – they were then, for a long time, outperformed by the US. To me at least the reason is simple – free trade and a respect (but not necessarily a reverence) for the market in the US. The periods of low growth in the US have always corresponded with high levels of protectionism and other government interference there. Whether this is cause or effect is debatable (I believe cause), but your position on free trade I believe mean that you largely agree with this.
    I would be interested to see your justification for a minimum wage, other than your bald statement; as, to me at least, even if the clearing rate is just above starvation (a conclusion I can find no evidence for) then at least the workers would be earning a wage, rather than none at all, while their skills degrade and dis-savings occur.

  63. Terje
    December 29th, 2005 at 08:42 | #63

    I would prefer a government funded social wage instead of a minimum wage. If we are going to subsidise the unskilled then it is better that the subsidy is funded from a broad based tax rather than from the specific businesses involved.

    One of the problems with welfare as it exists is that people are penalised for trying to become independent of it. And minimum wages criminalise employers that might assist them.

    If we are to have a minimum wage then it should be set at a local government level to suit the conditions of particular economic regions. If an area has high unemployment then it should be free to lower its wage claim in order to attract capital (ie employers).

    I would propose that we lower the federal minimum wage from $12.30 to something like $7-$8 and then allow the regional areas to set a higher level if they see fit. I envisage that this would require enabling legislation at the state and/or federal government level.

  64. Dogz
    December 29th, 2005 at 09:36 | #64

    If we are to have a minimum wage then it should be set at a local government level to suit the conditions of particular economic regions. If an area has high unemployment then it should be free to lower its wage claim in order to attract capital (ie employers).

    Eek. I don’t know where you live Terje, but I wouldn’t trust my local reps to run a chook raffle, let alone set something as important as the minimum wage.

  65. Steve chidio
    December 29th, 2005 at 11:30 | #65

    Andrew R

    I’m speechless at your accusation.

    This is what I believe.

    I think the left is only half right with its correctly held view that wages need to be tightly controlled by government mandate. However the part left out is that we also need to ensure effective regulation of prices of goods and services just as tightly as wages. After all, why simply stop at wages. The average person needs to consume as well. This is the only way the left can demonstrate to the average person in this country that we care about their needs.

    The effect of this policy is that it would enable government to control inflation seeing that under this proposal it would be legislated out of existence. It would simply disappear in the plug hole of history.

    If firms were finding it hard under these new arrangements we could through a nationalized banking system ensure that funds are amply provided to those sectors that found it hard to survive. Of course interest rates would be set at a level that would ensure prosperity for the long term and there would be no more of these business cycles to worry about.

    If only wages are controlled and prices left to market greed we would only be solving half the problem.

    So please take this as a serious addition to the conversation we are having here. Control wages and control prices too!!!

  66. Terje
    December 29th, 2005 at 14:58 | #66

    Steve,

    If you control prices the market will respond by moderating quantities.

    If you then control the quantities by nationalising industries or proping them up with subsidies then you will create inefficiencies. Without a price signal relative scarcity will not be communicated in a timely fashion and waste will proliferate.

    If you create inefficiencies then the total output will fall and we all become poorer (the most vulnerable first).

    You will also create a lot of criminals as anybody with sanity flees to the black market.

    When the Soviet command economy was in full swing they got KGB spies to obtain department store catalogues from the USA and elsewhere. It was the only way they could obtain prices to mandate that made some sence.

    If your system ever comes into being then most of us would either move abroad or move into the underground economy.

    Inflation is a situation in which the currency looses value. If you crush the economy with the policies you suggest then inflation will be more than happy to ignore its legal status.

    Regards,
    Terje.

  67. SJ
    December 29th, 2005 at 16:30 | #67

    dogz Says:

    No SJ, that map was evidence in support of my asserion that most of the EU’s growth is coming from the new eastern-bloc additions. Go back and read the thread.

    If your economy is already extremely efficient, and you already have a GDP per capita 40%-50% above the EU, then it is unsurprising that you’re not going to grow that rapidly. You could use a similar argument for the lower growth in the old socialist Western European countries if they were at the top of the economic totem pole. But unfortunately they are not.

    Let’s recap. Growth in “sclerotic” Western Europe is about the same as in the US. Growth in Eastern Europe is higher. At some time in the past, growth in the US was higher, so it reached a level where its per capita GDP was higher, but then reverted to the same growth rate as “sclerotic” Western Europe (i.e. stagnated). And this makes the US an ovbiously attractive investment target now, for some as yet unexplained reason. Is that a fair summary?

    By the way, the difference in per capita GDP between the US and Europe isn’t due to some magical “dynami[sm]“. It’s almost entirely explicable by differences in hours worked:

    The stability of the U.S.-EU gap in relative income on a per capita basis comes from the decline in hours worked. To be specific, in the United States, over the period 1970 to 2000, GDP per hour increased by 38%. Hours worked per person also increased, by 26%. Thus, GDP per person increased by 64%.

    In France, over the same period, GDP per hour increased by 83%. But hours worked per person decreased by 23% — so GDP per capita only increased by 60%.

    So Americans have to work longer hours. Good for them.

  68. Mike Hart
    December 29th, 2005 at 20:13 | #68

    Hmmm, back to the Hausmann and Sterzenegger hypothesis and the issue of CAD or internal v external balances. The only recent example we have to the US predicament was the collapse of the Japanese stock market and real estate bubbles of the 80′s, their internal economy has stagnated for the past twenty plus years, kept afloat by a continuing trade and foreign income surpluses, discreet strategic withdrawals of capital from foreign equity operations and massive public spending. Shielding the banking system from reform did the rest.

    In the US, the FED under Greenspan reset interest rates to zero, then Bush ensured the loss of pain would be minimised to the twenty percent who actually own the US by substantial tax cuts. Together they were but the old monetary and fiscal stimulus tricks but this time targeted at the capital holders at risk. The pension funds (super funds) kept a floor under the stock market valuations, still at the 10,000 plus mark of the peak (Some may say they are merely flat-lining), Buffet and the chap at Yale who called it irrational exhuberance do not appear to have changed their views about the stock markets. Buffet Corp is finding it hard to park their cash probaly just as well given the off balance sheet liabilities now appearing courtesy of climate change and peak oil. A few high risk operators with implausible balance sheets went under, ENRON, WorldCom immediately, others trade under Chapter 11 protection (US Airlines). They have effectively devalued the currency since.
    It does seem more plausible that income from outside is a major factor masking the monetary proligacy of the US. The US has substantially diversified its production base over the years to outside the US so keeping the wheels of commerce well oiled. The expansion of derivative commoditisation has in the low interest rate environment masked risk, so very high risk activities are trading at low risk rates, the high risk activity is providing a substantial impetus as well but perhaps most importantly the seignorage on the US currency is perhaps doing the rest. The fact that the Europeans have fallen at the start on the EURO has created sufficient doubt as to it being a viable alternative to the dollar to keep everyone in US dollars, world commodity contracts written in US dollars as do the strong cross flows between China and the US help keep the trade in US dollars going. It is appears to me to be simply the mass of money keeping the US ship afloat not its direction of travel. Question is will world markets digest a second devaluation when an interest rise is next required? There a lot of holes in the US and Australian economic miracles and as predicted by the Reason Model those holes are starting to line up. The question is what factor will travel through all the layers and create a major accident. A crystal ball is about all that will help here. Israelis blowing the crap out of an Iranian nuclear site might just provide the trigger.

    Perhaps it is not so much a matter of dark matter but rather being so deeply in it you cannot see that you are?

    As for Oz? well the Liberals trick of stimulating the housing market has merely delayed the inevitable. As the Chinese curse goes; ‘May you live in interesting times’.

    Happy New Year, 2006 is going to be a very long one indeed.

  69. December 30th, 2005 at 07:08 | #69

    I’ve read with pleasure. Maybe it’s offtopic, but i just wanted to say, that it’s really interesting to read everything this with the comments… You discuss here a lot of interesting things on different useful themes. Thanks for that =)

  70. Ian Gould
    December 30th, 2005 at 18:13 | #70

    Steve Chidio:It’s only a small step for someone like you to reach the conclusion that I have reached in that in a post industrial age we don’t need free markets in anything.

    And it’s an equally small step for “someone like you” to decide that if he wants to sell strychnine-laced heroin on the streets that’s purely a matter of private business decisions between free individuals which governments shouldn’t interfere with.

  71. Ian Gould
    December 30th, 2005 at 18:17 | #71

    Andrew Reynolds:Achieving high growth rates from a low base is not difficult. The path to reasonable success is already mapped out for you – you do not have the expense of taking blind alleys to deal with. The fact that France has not radically outperformed the US, coming from a lower base (whether 50% or 70%) even without the blind alley costs to me indicates that there is a problem.
    Most of the nations cited were, at one time or another, among the wealthiest on Earth – they were then, for a long time, outperformed by the US. To me at least the reason is simple…

    but Andrew loking at the US Bureau of Labor Statistics figures I cite earleir, the US outperformance occurred primarily before 1960 – i.e. during after World War II.

    The time series data since then suggests that the Europeans have in fact been catching up.

    The single most important step they could take to accelerate that process would probably be to increase immigration.

  72. Ian Gould
    December 30th, 2005 at 18:19 | #72

    Dogs, still curious why you applied that multiplier to the PPP GDP figures.

  73. Dogz
    December 31st, 2005 at 05:40 | #73

    Let’s recap. Growth in “sclerotic� Western Europe is about the same as in the US. Growth in Eastern Europe is higher. At some time in the past, growth in the US was higher, so it reached a level where its per capita GDP was higher, but then reverted to the same growth rate as “sclerotic� Western Europe (i.e. stagnated). And this makes the US an ovbiously attractive investment target now, for some as yet unexplained reason. Is that a fair summary?

    I am not sure that US growth rate is as low as the sclerotic parts of Europe, at least not overall. Give some sources SJ.

    Why invest in the US over France:

    #1: if my investment is in a consumer-oriented product, the consumers have 43% more money to spend so it’s going to be an easier sell

    #2 less bureaucratic interference. No agents of the state hiding in bushes waiting to fine people who work too hard.

    #3 more flexible hiring and firing – far easier to get rid of underperforming workers.

    #4 stronger investment culture.

    #5 much better infrastructure (service professionals, investment professionals, trained workers) for high-tech startups

    #6 much larger domestic economy

    #7 greater meritocracy in the workplace

    #8 greater culture of achievement amongst employees

    (if you want more I can give you a lot more reasons)

    I wouldn’t invest in a unionized American steel company or airline, since they exhibit the same traits as sclerotic Europe. But I can find many more dynamic sectors in the US economy than that.

    That said, if France and old Europe as a whole are changing to adopt more investor-friendly traits, then I would invest there instead, precisely because they have a growth free-kick coming off their lower base.

  74. Dogz
    December 31st, 2005 at 05:55 | #74

    Ian, the difference between our PPP figures is just the choice of baseline: you say France is 30% less than US, I say US is 42% more than France. Both are correct.

    $27737/$39495 = 0.702
    $39495/$27737 = 1.424

    My figure is how a Frenchman feels migrating to the US (his PPP is 142.4% of what he had before), your figure is how an American feels migrating to France (PPP is 70.2% of what he had). All other things being equal of course, which they never are.

    Same phenomenon in house prices: a 25% fall in prices wipes out a 33% rise, since the gain is almost always expressed as a function of the starting price (before the rise), and the fall is expressed as a function of the end price (after the rise).

  75. Ian Gould
    December 31st, 2005 at 23:23 | #75

    Dogz,

    your preference for bthe US as a palce to invest doesn’t seem to be shared by the overall market if we compare the negative return on the Dow for 2005 (and low single-digit returns on S&P and Nasdaq) with the 20%+ plus returned by European indices.

  76. SJ
    January 1st, 2006 at 16:16 | #76

    Dogz says:

    I am not sure that US growth rate is as low as the sclerotic parts of Europe, at least not overall. Give some sources SJ.

    Um, it was your own source that I used. If you don’t like the conclusions that follow from the data you provided, it’s kinda up to you to provide something else. Duh.

    Why invest in the US over France:

    #1: if my investment is in a consumer-oriented product, the consumers have 43% more money to spend so it’s going to be an easier sell

    I’m not sure whether you realise this, but people in the US are able to buy stuff that gets manufactured outside the US. And it seems that they prefer to do so, hence the trade deficit that John was talking about.

    The rest of your points are just hand-waving nonsense. Right wing talking points that don’t show any measurable result. For example, WTF does “stronger investment culture” mean, and why does it cause the US to be an attractive place to invest?

    Ian Gould Says:

    negative return on the Dow for 2005

    This is factually incorrect. The Dow started the year at about 10,600, and ended at about 10,700, i.e. a positive return of about 0.9% neglecting dividends.

    Of course, your point is well taken that the performance of the US market in 2005 was terrible in comparison to Europe. In fact, it was terrible in comparison to just about everywhere else in the world, not just Europe.

  77. Dogz
    January 2nd, 2006 at 12:50 | #77

    The rest of your points are just hand-waving nonsense. Right wing talking points that don’t show any measurable result. For example, WTF does “stronger investment culture� mean, and why does it cause the US to be an attractive place to invest?

    Go live there SJ, and you’ll see what I mean. I have lived in both the US and France.

    I guess I prefer “Right wing talking points” to your left-wing BS. Especially when one of those talking points is 42% greater GDP per capita. It is clear that you have made up your mind that the US is inherently bad, much as the rest of the Australian chattering class, most without ever having set foot in the country.

    But I wouldn’t want to disabuse you of that notion SJ – you might not get invited to anymore dinner parties if you actually took a rational approach.

  78. Ian Gould
    January 2nd, 2006 at 14:10 | #78

    DogZ: “The Dow started the year at about 10,600, and ended at about 10,700, i.e. a positive return of about 0.9% neglecting dividends.”

    Not according to Reuters:

    http://biz.yahoo.com/rb/060101/markets_stocks.html?.v=2

    “The Dow declined 0.61 percent in 2005, breaking its streak of back-to-back gains for 2003 and 2004.”

  79. Ian Gould
    January 2nd, 2006 at 14:12 | #79

    Dogz: “It is clear that you have made up your mind that the US is inherently bad, much as the rest of the Australian chattering class, most without ever having set foot in the country.”

    Actually this debate started with you proclaiming the US superiority and condemning France and the rest of Europe.

    I suppose by your logic if one got into an argument with a white supremacist and argeud that other races were not in fact inferior that’d be an example of anti-white racism on your part.

  80. Dogz
    January 2nd, 2006 at 14:48 | #80

    DogZ: “The Dow started the year at about 10,600, and ended at about 10,700, i.e. a positive return of about 0.9% neglecting dividends.�

    That was SJ, not me.

    I suppose by your logic if one got into an argument with a white supremacist and argeud that other races were not in fact inferior that’d be an example of anti-white racism on your part.

    I gave up on logic at SJ’s “The rest of your points are just hand-waving nonsense”. Little point arguing intelligently against that.

  81. Ian Gould
    January 2nd, 2006 at 14:51 | #81

    Dogz, sorry. Sometimes it becomes hard to tell the dogz and Katz apart.

  82. Will De Vere
    January 2nd, 2006 at 20:04 | #82

    Bringing back a draconian gold standard (every gram will equal precisely $35-49AUD) will enable us to sort the dogz from the catz, sheepz from goatz etc. If the 15th largest economy in the world can’t showz the wayz, who can?

    The rest of the world is panting for someone to take the lead and draw a line in the beach. The AUD could become a kind of benchmark. For something.

    In memory of Auric Goldfinger.

  83. Terje Petersen
    January 2nd, 2006 at 21:08 | #83

    If Australia were to implement a gold standard tomorrow then fixing the value of the Australian Dollar somewhere between 20 to 29 milligrams of gold would be highly inflationary and highly destructive. A more realistic and effective target would be somewhere between 50 and 60 milligrams.

    I am all in favour of a gold standard but I am not at all interested in a draconian gold standard.

  84. mike hart
    January 2nd, 2006 at 21:57 | #84

    Lot of arguments here about whose is bigger, what is better pretty dissapointing reallly.

    GDP is an arbitary accounting standard for national account, nothing more nothing less, what you choose to count is up to you. Like all things ‘moderne captitalist’ the distinction is about bigger and better, so what? You have 5/6 of the worlds population in dire poverty by your measures so you are really arguing on the margins. The standard economics texts measure quantity and value (price) but have no vector analysis applied, try adding an arbitray Z factor to your equations and see what you end up with (Hint: you’ll need a simple matrix to solve multiple equations). The vector is direction, standard physics any body moves has mass speed and direction, get it!

    The issues raised went to the notion of continued borrowing my a country that sold most of its prime assets overseas, became a branch for various multinationals, borrowed more money to fund non productive real estate speculation, has foriegn borrowings at over 50% of national income, maintains a current account deficit in the negative range year after year, has little overseas income to offset this imabalance, and calls itself the lucky country. If I remember my old Prof correctly (said Donald), he was on about second rate idiots not luck. So what you gonna do when the cards at the limits the question?

    Don’t know what this gold standard crap is. The last mob to try it failed, the good old boys at the Bank of England in the early twentieth century. The crux is redeemability, my paper for your gold, how you going to do that witha derivatives contract? The paper value is arbitrary, see Keynes ‘General Theory’ for some illumination.

  85. SJ
    January 2nd, 2006 at 22:04 | #85

    Ian Gould says:

    Not according to Reuters

    Well, what I said about where the Dow started and finished the year is technically correct, but yes, you’re right, I came up with the wrong answer. I should have compared the end of December 2005 number with the end of December 2004 number.

    Dogz Says:

    I guess I prefer “Right wing talking points� to your left-wing BS. Especially when one of those talking points is 42% greater GDP per capita.

    I did ask you to reconcile your talking point with the existence of the trade deficit. You are apparently unable to do so. I believe I also asked you some specific questions relating to your “stronger investment culture” talking point. So much for your ability to argue “intelligently”, as you put it.

    Recall that this all springs from your initial assertion about why people invest in the US: “People invest in the US because it is by far the most dynamic economy on earth.” If you can explain this rationally, I’m still waiting for the explanation.

    You haven’t yet risen above the level of Dennis Denuto in The Castle: “it’s the Constitution, it’s Mabo, it’s justice, it’s law, it’s the vibe”

  86. Ernestine Gross
    January 2nd, 2006 at 22:09 | #86

    Terje,

    1. In which sense can one country unilaterally implement ‘a’ gold standard? In other words, what do you mean by ‘gold standard’. I seem to recall we’ve been on this topic before. The term ‘gold standard’ has a meaning in the economic literatue. (This meaning is unaffected by your attitude toward Paul Krugman.)

    2. There are various grades of gold. Any suggestions as to which grade? (My question does not indicate in any way that I would support whatever it is that you seem to be advocating).

    3. How do you think knowledge of the quantitative relationship between the estimated amount of gold of various grades ‘under the ground’ and the dollar (fiat money) amount of foreign trade of a particular country would influence economic agents’ believes about the credibility of having ‘a’ gold standard as an anti-inflationary policy measure?

  87. SJ
    January 2nd, 2006 at 22:26 | #87

    mike hart Says:

    Lot of arguments here about whose is bigger, what is better pretty dissapointing reallly.

    Terribly sorry to have disappointed you. Why not go and try to set Brad Setser’s crowd straight instead?

  88. Terje
    January 3rd, 2006 at 11:08 | #88

    1. The monetary policy I advocate (and refer to as a gold standard) is one in which the target of open market operations is a particular value for the national currency measured in gold. For instance we might have a target for open market operations that aims to hold the value of the Australian dollar between 49 millgrams and 51 milligrams of gold. Interest rates would float. I expect interest rates would tend downward towards the leasing rate on gold.

    2. Not overly important as long as it is clear. I would suggest a purity of 0.9999.

    3. If a nation has a lot of gold under the ground I don’t think it would make much difference to financial confidence or inflation expectations. Confidence in a nations monetary policy is more about politics and track record. There are two primary ways to get gold if you don’t have it. One is to invest a lot in digging it up. The other is to sell a lot of things in exchange for it. Obviously any nation should produce in the area where it has the greatest comparitive advantage.

    I know we have had this discussion before. Will De Vere is the one that raised it again, not me.

    If you want to use something other than “gold standard” to define the system I outline then call it a “gold polaris monetary standard”.

  89. Ernestine Gross
    January 3rd, 2006 at 13:18 | #89

    What would be the policy objective of a “gold polaris monetary standard” for a single country?

  90. Terje
    January 3rd, 2006 at 14:07 | #90

    1. Monetary stability.
    2. Cheaper credit.

    My two major criticisms of the current system are:-

    a) It targets consumer price inflation which is a lagging indicator. In the process it ignores monetary errors that show up in leading price indicators like commodities and currency spot markets. Monetary errors disrupts the proper function of price signals and investment decisions.

    b) It uses interest rates as a short term target for open market operations and in the process disrupts the process by which “credit” is priced.

    The current regime also builds on the mentality that says the economy needs to be managed by experts beauracrats, however this is more of a criticism of the political culture rather than of economic outcomes. I don’t think we need billionaires like Frank Lowy and Robert Gerard (or unionists like Bill Kelty) regulating the price of credit.

    We could also access deeper credit markets by either targeted the AUD-USD exchange rate or the AUD-EURO exchange rate. However we would I believe do so at the cost of monetary stability. I don’t think the EURO or in particular the USD are very stable reference points.

    Also there is a third major benefit should a single nation such as Australia adopting such a policy. It would provide leadership to other nations and make the possibility of bringing an orderly end to floating exchange rates more likely.

  91. Ernestine Gross
    January 3rd, 2006 at 14:59 | #91

    Terje,

    Thanks for your reply. I would agree with the proposition that there are major unresolved theoretical issues in monetary economics. IMHO, the root cause of the problem is quite well described in the academic literature (eg Handbook of Monetary Economics, 1990). It is the absence of an adequate theoretical concept of ‘money’, which is of practical usefulness.

    While I appreciate your personal perserverance with a version of a gold standard, I don’t share your trust in the methodologies of the neocons (supply siders, economic rationalists….) – back to the future. For example, there is nothing in your model which even vaguely provides a link between the outcomes you want and how the decisions of economic agents (individuals, corporate and non-corporate business, governments and their agencies) would result in the outcome you want. People are asked to believe (even though both, theoretical knowledge and empirical data are at varince with the proposed beliefs). Words such as ‘leadership’ do not substitute for knowledge.

  92. Terje
    January 3rd, 2006 at 16:13 | #92

    Ernestine,

    You don’t trust the metods of the supply-siders and I don’t trust the methods of the current monetary regime.

    Just for fun can you offer me something in the model we currently use (ie RBA style inflation targeting) that vaguely provides a link between the outcomes you want (or think it achieves) and how the decisions of economic agents (individuals, corporate and non-corporate business, governments and their agencies) result in this outcome.

    Regards,
    Terje.

    P.S. I appreciate your personal perserverance in highlighting the current lack of an adequate theoretical concept of ‘money’. When your student publishes his/her work and you can speak freely then I would be interested in knowing more.

  93. Ernestine Gross
    January 5th, 2006 at 08:22 | #93

    Terje, you have the answer to your ‘fun question’ already:An economic agent model with a suitable concept of money. The methodology does not allow for outcomes one ‘wants’; its purpose is to allow a distinction between theoretical knowledge and raw ideology or wishful thinking.

  94. Terje Petersen
    January 5th, 2006 at 10:56 | #94

    Ernestine,

    I get the impression that if we were on a “gold polaris monetary standard” and somebody suggested that we implement “inflation targeting” with a government body using open market operations to fix a given interest rate target then you would disagree with their proposal due to their lack of a suitable “concept of money”.

    In other words you are equally opposed to all monetary policy arrangements.

    Regards,
    Terje.

    P.S. I borrowed your earlier definition of “concept of money” to create a relevant article at wikipedia.

    http://en.wikipedia.org/wiki/Concept_of_money

  95. Ernestine Gross
    January 5th, 2006 at 12:36 | #95

    Terje,

    1. I am afraid, your impressions have nothing at all to do with me.

    2. So far I have not found one post written by you on this site which is original and useful on any economic topic. That means, in the absence of anything better, I strictly prefer the RBA’s work to yours.

    3. Since you borrowed my sentence you will have to return it.

  96. Terje Petersen
    January 5th, 2006 at 13:44 | #96

    1. Your fear has nothing to do with me.

    2. I can’t say I have learnt a great deal from you either but I have enjoyed some of our discussions (others have been quite painful). You don’t have to respond to my comments if you don’t wish. If you get nothing out our conversations then that is perhaps the best way to avoid a discussion. Of course how you proceed is up to you.

    3. Sorry wrong word. I copied. I will change the wikipedia article if you object. However given that johnquiggin.com is licenced under the creative commons terms, given that I copied (with modifications) one single sentence and given that I advised you of what I had done I did not think you would mind too much.

    4. I don’t know how you arrived at the following conclusion:-

    For example, there is nothing in your model which even vaguely provides a link between the outcomes you want and how the decisions of economic agents (individuals, corporate and non-corporate business, governments and their agencies) would result in the outcome you want.

  97. Terje Petersen
    January 5th, 2006 at 14:05 | #97

    Ever keen to grasp the essence of what you are getting at with the “Concept of Money” I did a google booksearch on the topic.

    For me the first book on the topic that Google lists is somewhat ironic.

    http://books.google.com.au/books?q=concept+of+money&oi=print

  98. Ernestine Gross
    January 5th, 2006 at 17:16 | #98

    1. English is a tricky language (as are others). Perhaps it would be clearer if I wright: Regrettably, you impressions about my thoughts turn out to be assumptons that are false.

    2. –

    3. First you told me you borrowed a sentence. My applied area of Economics is Finance. I take the word borrow seriously. Now you tell me that you copied the sentence, modified it, put it as an article on Wikipedea, refer to johnquiggin.com is licenced under the creative commons terms. I assume the ‘article’ has been put up under ‘no name’. Well, it seems to me the requirements for having a creative article put up on wikipedea are very modest.

  99. Ernestine Gross
    January 5th, 2006 at 18:21 | #99

    Sorry, I overlooked the last point.

    4. I reached to conclusion on the basis of information made available to me.

  100. Mike
    January 5th, 2006 at 19:57 | #100

    Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…Lenin was certainly right. – John Maynard Keynes

Comment pages
1 2 2767
Comments are closed.