Brad Setser on dark matter in the balance of payments

I often refer to stories posted to Economist’s View without giving the proper attribution. I credit the story, but not Mark Thoma having brought it to my attention.  Sorry about that. This one comes from Economist’s View, which is a great site, IMV.  It has great original content and every day provides some very cool links to other stuff. I feel a bit silly giving this endorsement. I could use his endorsement much more than he could use mine.

Dark matter refers to the invisible overseas asset that must exist to explain how the US can run chronic current account deficits and the rising net external debt (very roughly) implied by that and yet not run a deficit on the investment income account.  It is a metaphor, and you know how I feel about them.

I am open-minded about the possibility that there might be dark matter in the US balance of payments.  The issue is not that Americans have “magical” investment skills, as Brad Setser somewhat snarkily and unfairly labels them. Rather, the issue is that foreign investors are willing to hold low-yielding US$ assets (liabilities to us) because they are safer and more liquid than the rest.

That drives down the cost of carrying the liabilities side of the net external debt. The argument may be overstated, but it is not mostly about American investment acumen and cannot be dismissed as mere American arrogance. Minor tsk tsk, then. (There is a lot of American arrogance and the comeuppance is surely coming, but dark matter is not just that, IMV.)

Having said that, Setser suspects that US trade in intellectual products may be getting improperly recorded, in which case the “puzzle” would be resolved in part by recognizing that the trade and current account deficits have been smaller than recorded. To me, that is interesting and he surely knows more about it than I do.

I am still biased to like dark matter — and for the wrong reason. Just as Amos Tversky says of metaphors generally, this one is really “vivid and memorable“.