Wednesday, October 31, 2007

More Missing Trillions!!??

Some time back I realized that the 2+ trillion I thought was missing from the Pentagon was a misunderstanding on my part of how these things work.

Perhaps I was looking in the wrong place...

Christian Scientist Monitor:

The mystery of the missing $2.9 trillion

Economists scour the US to find out why we're more in debt than the Department of Commerce says we are.

Like most people, economists love a mystery – especially if it involves not a missing person but a missing $2.9 trillion in United States debt.

That's $2.9 with 11 zeros after it.

Some words of explanation: Every quarter the Department of Commerce comes up with the US "International Investment Position." At the end of 2006, for instance, the US had a net negative position – by this measurement of international assets and liabilities – of $2.6 trillion. In other words, the country is by far the world's biggest debtor nation.

A quarter century ago, the US was the world's largest creditor nation.

The economists at Commerce count American-owned private assets in foreign nations (plants, equipment, retail outfits, property, corporate stocks and bonds, etc.), US official international reserves (gold, special drawing rights, foreign currencies), and other US assets abroad. The measurements get complicated. Then these economists count what foreigners own of American assets, looking at the same list of assets.

Subtracting the value of American international assets from what foreigners own of American assets, they come up with how much Americans are in debt to other nations and their peoples.

But if you look at the current account of the US balance of payments, which measures primarily the balance of trade, and also flows of interest and dividends, foreign aid, and other international transfers, the US should be far deeper in hock – $2.9 trillion more over the years from 1990 through 2006 than the official $2.6 trillion. Every month, the Commerce Department has reported huge deficits in trade and the broader current account. These deficits have to be financed somehow by foreigners, and so the US should be piling up its international debts in grand style.

[. . .]

There's more to the mystery than that, however. One advantage for the US is that the dollar is the primary currency used in international reserves of other nations and for invoicing international trade and investment, such as for oil and other commodities.

So when the dollar loses value, foreign holders of dollar assets lose on their dollar investments. Almost all US foreign liabilities are in dollars and about 70 percent of US foreign assets are in foreign currencies.In what Gourinchas calls an "eye-catching, back-of-the-envelope calculation," a 10 percent depreciation of the dollar represents a transfer of 5.3 percent of US GDP from the rest of the world to the US. America's GDP is currently $13.7 trillion, and the dollar is down 20.6 percent since 2002. So foreigners have – in effect – given the US about $1.3 trillion.

It's not really that simple, emphasizes Gourinchas. Nonetheless, the US has had a free lunch.

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