Thursday, June 18, 2015

Michael Pettis 'Internal and external balance'

"The Leaderless Economy makes the same point I try to make in The Great Rebalancing: the economic analysis of any country is largely useless if it ignores, or treats as a minor issue, links with the external sector – i.e. other countries – and this is even more true today than in the past. Even something as important, and as seemingly “domestic”, as the US savings rate (which for most people is assumed largely to reflect cultural preferences towards thrift among American households) is not determined primarily by American households but rather by its links with savings distortions abroad.
This might seem a profoundly counterintuitive statement, but in fact you only need to understand two or three accounting identities to be able to work logically through the explanation. " says Michael Pettis in a review of 'The Leaderless Economy' and of his own work. 
See also his response to the first comment on dark matter. An excerpt "The authors argue, like I do in my May 17 blog entry, that our accounting systems fail adequately to measure all the things they should measure, and while my entry is about the failures of GDP calculations, they focus on the failures of balance of payments calculations. They argue that countries import and export value that cannot easily be calculated or included in the B-o-P measures, which they call “dark matter”, and for this reason certain current account deficits and surpluses may be overstated while other current account deficits and surpluses may be understated.
They identify three forms of dark matter in particular that countries like the US may be exporting. First, outward FDI may come with considerable technical and technological expertise that isn’t correctly valued in the FDI numbers (on a relative basis). Second, some countries, most obviously the USA, serve an insurance function which creates a premium foreign investors effectively pay. Third. some financial markets, again most obviously the USA, serve as liquidity providers, which also creates a premium foreign investors effectively pay.
They calculate each of these and estimate that the US is a huge exporter of dark matter, followed by the UK, with Germany ranking fourth. Developing countries, especially Asian, are the biggest importers, although Russia is the largest importer."


Santaraksita D said...

Sorry for posting a comment unconnected to the post but as a regular reader of your blog, I thought I'd point your attention to this interesting post by Mumford just in case you hadn't already seen it:

gaddeswarup said...

Thanks, I have not seen it but read his earlier letter. I am also tryin to et hld of a copy of "Beyond Caste" by Sumit Guha which is not easily available here. That is highly recommended by a couple of reviewers. I do think that persistence of caste is a real problem and one has to try to understand it. Thanks again.

gaddeswarup said...

I read the post but do not see as very insightful. Of course, his attentions are good. I see caste as essentially political. Mumford could have more easily studied the two mathematical institutes in Chennai, their origin, development, and the personnel there. He visited those places a number of times and has many friends.