Sunday, May 21, 2006

After the empire

by Emmanuel Todd seems to be an interesting but erratic book with some valid points. Here are some reviews both favourable and critical:,6903,1143265,00.html

Todd seems to be one of the several people who currently see the beginning of the demise of the American empire ( he is also among several who predicted the collapse of the soviet union). As far as I can see, Todd is not anti-American and actually sees several years of American hegemony from the 50’s as beneficial to the world. According to him, the problems are over consumption and dependence on oil, shift from production to financial services, growing trade deficits. Though there were intentions during Carter’s time to lessen oil dependence, the Russian march to Afghanistan again brought USA to the mode of controlling oil supplies. The increase in military spending, imports etc saw the deficit increasing. Todd thinks that the option of militarism (instead of the harder option of less dependence on oil, increase in production rather than over reliance on services) is just a soft option which appealed to some of the conservatives after the collapse of USSR. The result is an empire which cannot afford democracy everywhere since it cannot otherwise maintain its current consumption levels.
There are some studies ( which has a link to a paper by Harvard economists Hausman-Sturzenegger) which argue that the deficit is not really deficit since US is still making money overall. From 23/01/06 report in the Economist:
“Thanks to its chronic trade deficits, it stood $2.5 trillion in the red at the end of 2004. And yet it still somehow manages to earn more on its foreign assets than it pays out to service its much bigger stock of debts: $36.2 billion more in 2004.Most economists conclude that America earns a higher return on its overseas assets (eg, EuroDisney) than foreigners earn on investments in America (eg, Rockefeller Centre). They don their anoraks, immerse themselves in the data and try to work out why this might be so. Messrs Hausmann and Sturzenegger turn the question on its head. It is not the $36.2 billion of income that is the mystery, they say. The anomaly lies in the $2.5 trillion of debt. If America is still coming out ahead of foreigners, then, contrary to popular belief, it must still be a net creditor. America must have more foreign wealth than we can see.The two authors have borrowed a name for this invisible wealth: dark matter. In theoretical physics, dark matter is the stuff in the universe that we can identify only by its gravitational pull. For the Harvard economists, dark matter is foreign wealth, the existence of which we can infer from the income it provides.How much of it is out there? You can calculate a price for an asset from the earnings it provides. Messrs Hausmann and Sturzenegger elect to value America's net foreign assets at 20 times their annual earnings, which corresponds to a 5% rate of return. Valued at this ratio, America's national "portfolio" of foreign assets and liabilities is really worth $724 billion, not minus $2.5 trillion. What is more, if its foreign assets are as stable as the authors say, it follows that "the country has not been running a deficit."Messrs Hausmann and Sturzenegger were the first to name dark matter, but not the first to discover it. In his book, "The United States as a Debtor Nation", published last year, William Cline, of the Institute for International Economics, performed the same calculation, backing out the value of America's net foreign assets from the income they generate. (Instead of calling it dark matter, Mr Cline, evidently not a born marketing man, called it "capitalised net capital income".)Mr Cline agrees with the dark materialists when they say there is "something misleading about calling a country that makes money on its financial position the world's largest debtor". But sadly he does not think Americans can stop worrying. After making $36.2 billion in 2004, America made just $4 billion on its net foreign assets in the first three quarters of 2005. If it continues on its present trajectory, it will shell out about $190 billion in 2010, Mr Cline calculates. Using Messrs Hausmann and Sturzenegger's methodology, America's net foreign assets would then amount to minus $3.8 trillion. A dark matter indeed.Ptaking on PtolemyApart from its name, the dark matter thesis appeals because of its simplicity. Philip Lane, of Trinity College, Dublin, thinks it too simple. It matters, he says, what a nation's foreign wealth is composed of. Foreigners hold a lot of American debt (bonds and bank loans), whereas America holds a lot of foreign equity, especially foreign direct investment (FDI). This has two implications. First, what America pays to foreign creditors depends a lot on interest rates, which have been unusually low in recent years. Second, the value of America's assets depends on the risks they carry. Yet Messrs Hausmann and Sturzenegger apply the same valuation ratio indiscriminately to bonds, equities, trade credits and bank loans on both sides of the balance sheet.That said, there remains a big gap in reported profitability between American FDI and FDI in America that risk alone cannot explain. Perhaps taxes can. To dodge the revenuemen, a multinational company might report artificially high profits in a low-tax jurisdiction abroad. This tax arbitrage, Mr Lane points out, can shift money from one line of the current account to another. But it does not change the size of the deficit one jot.To Messrs Hausmann and Sturzenegger, mainstream attempts to explain away dark matter look a bit desperate. Fond of their cosmological analogies, they liken them to the labours of medieval astronomers, trying to fit anomalous movements of the planets into their Ptolemaic model of the universe.But the authors' thesis raises anomalies of its own. By their own account, dark matter should be stable. It stems from abiding features of the American economy, such as managerial know-how, a prized but uncounted commodity that Americans export to their subsidiaries abroad. But as Ed McKelvey, of Goldman Sachs, points out, America's exports of dark matter seem to jump up and down wildly from year to year: $351 billion in 2004, $1.2 trillion in 2003, just $172 billion in 2002. Dark matter seems to fluctuate at frequencies that are not structural, nor even cyclical. Perhaps they are best described as epicyclical. “
So, in spite of some creative accounting, there is still a problem. Probably, many of the ideas touted by Todd will be disputed just like the above, but there seem to some interesting insights in the book.

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