Joseph P. Joyce — The Change in the U.S. Direct Investment Position

The U.S. has long held an external balance sheet that is comprised of foreign equity assets, mainly in the form of direct investment (DI), and liabilities held abroad primarily in the form of debt, including U.S. Treasury securities. This composition is known “long equity, short debt.” Pierre-Olivier Gourinchas of UC-Berkeley and Hélène Rey of the London Business School claim that this allocation has allowed the U.S. to serve as the “world’s venture capitalist,” issuing short-term debt in order to invest in high-yield assets. But the U.S. direct investment position has changed from a surplus to a deficit, with uncertain consequences for the international monetary system.

There is more than one reason for the change....

Angry Bear
The Change in the U.S. Direct Investment Position

Joseph P. Joyce | Professor of Economics at Wellesley College, where he holds the M. Margaret Ball Chair of International Relations. He served as the first Faculty Director of the Madeleine Korbel Albright Institute for Global Affairs.

Timothy Taylor — Some Facts on Global Current Account Balances

Maybe the trade war with China isn't actually about MAGA at all, but just economic warfare against a rising competitor. If trade surplus are so "unfair," why is the focus not on Germany given the figures, enquiring minds want to know. Or, do Donald Trump and his economic team not realize this?

Conversable Economist
Some Facts on Global Current Account Balances
Timothy Taylor | Managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul, Minnesota

Bank Underground — A prince not a pauper: the truth behind the UK’s current account deficit

Bank of England — Bank Underground
A prince not a pauper: the truth behind the UK’s current account deficit

Rachana Shanbhogue, Macroprudential Strategy and Support Division, and Stephen Burgess, Macrofinancial Risks Division

Peter Cooper — Open Economy Considerations: The Balance of Payments

One suggestion in the comments to the ongoing “short & simple” series is to cover the balance of payments. This will be covered at some point in the introductory series, but I am still considering how best to present it in brief, simple form. With that in mind, it seemed worth attempting a regular post on the topic. The post is still intended to be elementary in nature, but is perhaps at about the introductory university level. The post is also too long to qualify as “short”, even allowing for the fact that some recent parts of the series have already stretched the definition of “short” beyond what I would have preferred.

heteconomist
Open Economy Considerations: The Balance of Payments

Peter Cooper

Edward Harrison — Two things you should know about Germany’s budget surplus

So that’s where Europe is headed. First, budgetary discipline will continue to be an anchor principle. Second, getting the budget deficit down or into surplus is a lot easier if you have a trade and current surplus. German Finance Minister Wolfgang Schäuble wants Germany to lead the way on both these scores as a matter of ‘leading by example’. Third, the eurozone is indeed following this example. We can see the numbers; the euro currency area now has a surplus with the rest of the world, where just 6 or seven years ago it had a deficit.

I don’t know how long the EU wants this policy framework to continue. It ism’t clear if this is a ‘ride out the storm’ approach or a permanent policy framework. I believe they want the surpluses to continue indefinitely. But if these surpluses do continue indefinitely, Donald Trump will put Europe in his crosshairs. And we’ll have to see whether he’s all bluster or whether he intends to take action.

Credit Writedowns
Two things you should know about Germany’s budget surplus
Edward Harrison

Neil Wilson — A Sterling Performance

Why you can ignore most of what is written about floating rate currencies and why the commentariat always gets it wrong.

As long as banks supply liquidity to speculators, speculators can dominate markets. In external trade, as long a central banks provide liquidity to speculators, speculators can dominate international markets.

Currency is a policy tool and the government is the monopoly issuer through its central bank.

Yes, this implies that so-called capitalist free market economies are actually command systems. Central banks chose the policy to follow in any case, although they usually strive to create an illusion that the market is setting prices through competition. Even in setting interest rates, they are supposedly "following market expectations" rather than setting policy. Even Paul Krugman believes this.

Modern Money Matters
A Sterling Performance

Neil Wilson

Ramanan — On The Blogs

Ramanan takes Roger Farmer and Michael Pettis to task.

The Case for Concerted Action
On The Blogs

V. Ramanan

J. W. Mason — Only the Debt Is National

Imagine this set of transactions.

1. A bank in rich country A make loan of X to government of poor country B. Let’s say for concreteness that A is the united States, B is Nigeria, and X is $1 billion. So now we have a liability of $1 billion of the Nigerian government to the US bank, and deposit of $1 billion at the US bank owned by the government of Nigeria.

(Nigeria might just as well be Egypt or Mexico or Argentina or Greece or Turkey or Indonesia. And the United States might just as well be Germany or the UK. )

2. The deposit at the bank is transferred from ownership of the government to ownership of some private individual. It’s easy to imagine ways this can be done.

3. The residents of Nigeria, via their government, still have a liability of $1 billion to the bank, obliging them to make annual payments equal to the interest rate times the principal. In this case, let’s say the interest rate is 5%, so debt service is $50 million.

4. The payments can be met by running an annual export surplus of $50 million. As long as this $50 million annual payment is maintained, interest payments can be made and the principal rolled over; the debt will remain forever.

5. The private individual from step 2 moves from Nigeria to the United States, eventually becoming a citizen there.

The result of this: a family in the United States has a wealth of $1 billion. Meanwhile, the people of Nigeria make payments of $50 million each year to the United States forever, in the form of uncompensated exports. In their valuable book Africa’s Odious Debts and related work, Boyce and Ndikumana demonstrate that this story describes much of sub-Saharan Africa’s foreign debt. It applies elsewhere in the world as well.

I wonder how various people evaluate this scenario. Do we agree there is something wrong here? And if so, what, and what is the solution?

J. W. Mason's Blog
Only the Debt Is National
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York

Matias Vernengo — Greece on the verge

I discussed to a great extent the debate between Sergio Cesaratto and Marc Lavoie on the nature of the European crisis, that is, whether it is a balance of payments crisis or a monetary sovereignty one.

Cesaratto argues that a balance-of-payment crisis is possible in a currency union, and that the financial crisis of the Eurozone is indeed such a balance-of-payment crisis....

Yet, as noted by Lavoie, the Eurozone crisis seems to have been caused instead mainly as the result of an initial banking problem, which transformed itself into a public debt problem. In other words, the currency issue, and the functioning of the monetary union seem to be at the core of the crisis, not a balance of payments one....

My argument, discussed briefly here before, is that the Cesaratto and Lavoie hypotheses are one and the same. The balance of payments and the monetary sovereignty views of the European crisis are two sides of the same coin.....

Naked Keynesianism
Greece on the verge
Matias Vernengo | Associate Professor of Economics, Bucknell University

Philip Pilkington — Understanding the Current/Capital Account and the Value of the Currency

One thing that I notice on the blogs is that I don’t think I have ever seen anyone give a clear description of the external trade account of a country. Nor have I seen anyone give a clear explanation of what determines the value of a given currency….

Fixing the Economists
Understanding the Current/Capital Account and the Value of the Currency
Philip Pilkington

Randy Wray — MMT And External Constraints

Randy agrees with Brian and Neil.

Economonitor — Great Leap Forward
MMT And External Constraints
L. Randall Wray | Professor of Economics, University of Missouri at Kansas City

Neil Wilson — It's the Exporters Stupid

As usual Neil sums it up pithily.

However, in the EZ the exporting countries apparently haven't clued into this obvious fact yet and are killing the geese that lay the gold eggs for their economies by forcing austerity on the periphery and reducing their own exports as the periphery cannot afford them and also seeks to increase its own exports. Yes, Germany, we're talking about you in particular.

3spoken
It's the Exporters Stupid.
Neil Wilson

Brian Romanchuk — Why Rich Countries Should Float Their Currencies

This article provides more depth to some comments I made in"MMT and Constraints". I explain why developed countries should allow their currencies to float, which is the policy stance advocated by Modern Monetary Theory (MMT). It is probably a good idea for developing countries to float their currencies as well, but they face inherently difficult policy problems that I do not know enough about to comment on. The implication of advocating a free-floating currency is that I do not see the "external constraint" as being a serious issue, or at least an issue that policy makers can hope to do anything useful about.

In that previous article, I made some quick comments in response to an assertion by Thomas Palley that the "foreign exchange market constraint" is very important for countries other than the United States. Since he did not explain that assertion, I was unable to offer a very detailed criticism. My response was too short, and drew some comments. I expand my explanation here.

I will first explain why I do not think that there is a significant external behavioural constraint on policy makers; but an accounting constraint obviously exists.

I will also note that what I am writing is my opinion, and does not necessarily reflect the views of the economists who developed MMT. I think that poorer countries face some difficulties with free-floating currencies, a view with which they may not agree.

Bond Economics
Why Rich Countries Should Float Their Currencies
Brian Romanchuk

Matthew Higgins and Thomas Klitgaard — Capital Flight inside the Euro Area: Cooling Off a Fire Sale

Countries in the euro area periphery such as Greece, Italy, Portugal, and Spain saw large-scale capital flight in 2011 and the first half of 2012. While events unfolded much like a balance of payments crisis, the contraction in domestic credit was less severe than would ordinarily be caused by capital flight of this scale. Why was that? An important reason is that much of the capital flight was financed by credits to deficit countries’ central banks, with those credits extended collectively by other central banks in the euro area. This balance of payments financing was paired with policies to supply liquidity to periphery commercial banks. Absent these twin lifelines, periphery countries would have had to endure even steeper recessions from the sudden withdrawal of foreign capital.

Federal Reserve Bank of New York — Liberty Street Economics
Capital Flight inside the Euro Area: Cooling Off a Fire Sale
Matthew Higgins, vice president in the Federal Reserve Bank of New York’s Emerging Markets and International Affairs Group, and Thomas Klitgaard, vice president in the Research and Statistics Group