Tuesday, June 28, 2011

Inconsistencies in Reporting U.S. Trade Data? Is the BEA Following the Cash, or the Goods and Assets?

The BEA released data today on the "U.S. Net International Investment Position at Yearend 2010" with these highlights:
  • The U.S. net international investment position at yearend 2010 was -$2,471.0 billion, as the value of foreign investments in the United States ($22,786 billion) continued to exceed the value of U.S. investments abroad ($20,315 billion).   
  • There was a -$74.6 billion change in the U.S. net investment position from yearend 2009 to yearend 2010 that primarily reflected net foreign acquisitions of financial assets in the United States that exceeded net U.S. acquisitions of financial assets abroad.
  • Foreign acquisitions of financial assets in the United States were $1,245.7 billion in 2010, up substantially from $335.8 billion in 2009.
  • U.S. acquisitions of financial assets abroad were $1,005.2 billion in 2010, up substantially from $139.3 billion in 2009. 
MP: This analysis seems to depart from the way the BEA calculates trade data in the following way:

1. When U.S. imports (cash out) exceed exports (cash in), it gets reported by the BEA as a "trade deficit" because the accounting logic is based on following the cash, and not the goods.  Because the "cash out" for imports is greater than the "cash in" for exports, there is a "net cash outflow" from the U.S. to our trading partners, and we call this a "trade deficit."  

2. When the BEA calculates the international investment position, it seems to depart from following the cash, and switches to following the assets.  The fact that the value of foreign investments in the United States ($22,786 billion) exceeds the value of U.S. investments abroad ($20,315 billion) means that there has been a net inflow, or capital surplus, into the  U.S. of $2,471 billion.   And yet the BEA reports this as a negative -$2,471 billion because of the switch from following the cash (+$2,471 billion inflow) to following who ends up with the assets. 

Likewise, the BEA reports a -$74.6 billion annual change in the U.S. net investment position for 2010 because of a $74.6 billion capital inflow, or as the BEA stated because "net foreign acquisitions of financial assets in the United States exceeded net U.S. acquisitions of financial assets abroad" last year. 

Why the switch from following where the cash ends up (and not goods) when reporting trade data for the U.S., to following where the asset ownership ends up (and not the cash) when reporting the net international investment position for the U.S.?

If the government reported trade statistics the way it reports our net investment position, the BEA would follow where the goods end up and not where the cash ends up. In that case, it seems like the BEA would report our "trade deficit" instead as a "trade surplus."  Reason? We acquire more output produced in foreign countries in a given quarter or year than the output our trading partners acquire that was produced in the U.S. during that time period.  In terms of which country ends up with the most "stuff" on net, the U.S. would be running a "trade/stuff/output surplus," and not a deficit.  It's only because the BEA tracks which country ends up with the most "money" on net, and not the most "goods" on net, that the BEA reports a "trade deficit" for the U.S.

Alternatively, if the BEA reported the U.S. net international investment position the way it reports trade data, shouldn't it be reporting a positive $2,471 billion net investment position overall and a positive $74.6 surplus for 2010?  

The BEA is apparently reporting the the U.S. currently has both a "trade deficit" and an "international investment" deficit?  How can that be?

12 Comments:

At 6/28/2011 10:49 PM, Blogger Benjamin said...

My quick read of the table seems to say foreigners own huge amounts of US Treasuries, and USA'ers own private investments overseas.

In short, foreigners have lent us a lot of money.

So far. we can pay of our debts in dollars--all we have to do is print the stuff. It would behoove us to print a lot while we can, and pay off these debts in cheaper dollars.

At some point (and maybe it is happening now) people will properly come to devalue the dollar, and our exports, and income from foreign investments and tourism, should surge. Our real income will start to surge too.

Ben Bernanke, please print lots of money.

 
At 6/29/2011 1:32 AM, Blogger juandos said...

"The BEA is apparently reporting the the U.S. currently has both a "trade deficit" and an "international investment" deficit? How can that be?"...

Its all the fault of those dastardly ATMs...

 
At 6/29/2011 8:35 AM, Blogger Jet Beagle said...

Benjamin: "My quick read of the table seems to say foreigners own huge amounts of US Treasuries"

Are we looking at the same data? Yes, foreigners own $5 trillion worth of U.S. government securities. But that's only 22% of the Foreign-owned assets in the U.S.

Benjamin: "In short, foreigners have lent us a lot of money."

Yes, foreigners have invested trillions in the U.S.:

U.S. trasuries: $5.0 trillion
U.S. stocks/bonds: $5.9 trillion
U.S. bank deposits: $3.7 trillion
Fin derivatives: $3.5 trillion

So what?

U.S. citizens and companies have invested even more trillions of dollars in the U.S. The U.S. is a very stable economy and a sound place to invest.

 
At 6/29/2011 9:50 AM, Blogger VangelV said...

Benji:

At some point (and maybe it is happening now) people will properly come to devalue the dollar, and our exports, and income from foreign investments and tourism, should surge. Our real income will start to surge too.

J B:

U.S. citizens and companies have invested even more trillions of dollars in the U.S. The U.S. is a very stable economy and a sound place to invest.

I think that both of you are totally nuts.

Benji, a devaluation will destroy the purchasing power of the USD and will push millions on fixed income into poverty. Real incomes will collapse, not go up.

Jet, the real US economy is hardly stable. You have a financial system that is loaded up to the gills in bad consumer debt and is very exposed to sovereign defaults in the EU and elsewhere. You have small businesses that are in big trouble as they are hit by regulatory costs and rising input costs. You have the hosing industry falling off a cliff and an automobile industry that would have to be liquidated without government support. The states are bankrupt and the federal government is having trouble getting enough revenue to pay for daily operations. There is an arrogant but incompetent idiot in the White House and hundreds of corrupt idiots in Congress. The rule of law has been abandoned. Each day you see billions of debt and unfunded liabilities piled on. The role of government is expanding as is the size of government. There are active wars in at least three countries and you have troops stationed in more than 100 nations around the world. The taxpayer has to pay for $20 billion a year just to air condition tents used by the military.

None of this is sustainable and cannot reverse the trend that began nearly a century ago. The US economy had a very good run. Unless there are serious reforms made the American people will find themselves in exactly the same place as the British when their empire ended.

 
At 6/29/2011 9:58 AM, Blogger Buddy R Pacifico said...

"The BEA is apparently reporting the the U.S. currently has both a "trade deficit" and an "international investment" deficit? How can that be?"

Just like the neighbor that blows an inheritence on toys: When the money was gone, the pay-day loan outfit covered basic necesseities. Now, when the job is lost, the pay-day loan is paid with government stimulus financed by the toy sellers -- and the toys are covered with blue tarps.

 
At 6/29/2011 10:39 AM, Blogger VangelV said...

Central planning in communism decided about every microscopic detail of what should happen; macroscopic monetary policy only decides about one number - the money supply - and moreover, this decision occurs pretty much according to totally objective criteria meant to preserve a constant value of the money.

It does not matter. When you distort the price signal by fixing interest rates or by adding liquidity to create bubbles you have exactly the same problem. Keep in mind that the real battle between the free-market advocates and the socialists came down to the calculation debate.

So there's no communism and no "human factor" similar to the communist planning when it comes to guaranteeing a fixed level of inflation and your comparison shows that you have no understanding of economics.

Again I disagree. I hate to do this but I need to cut this off here. I need to go and deliver lunch to my eleven-year old son. I will try to get back to this point because I believe that the fallacy of the 'middle way' needs to be reexamined.

 
At 6/29/2011 1:24 PM, Blogger Jet Beagle said...

vangeIV: "I think that both of you are totally nuts."

I generally do not respond to people who use such insults.

 
At 6/29/2011 2:06 PM, Blogger Ivin Rhyne said...

If I had to guess how the BEA justifies the difference, it would be that trade accounts for goods that actually move and cross borders. So While the US is a net importer of goods, the cash from these purchases flows ultimately out to labor and capital located outside the US boundaries. On the other hand capital does not move, only it's ownership changes hands. However, when capital in the US is owned by people abroad, the profits from capital again flow to entities abroad.

In other words, the net flow of profits in both cases is out of US political boundaries and into other countries. I won't attempt to defend this logic since it is built on what seems like political optics rather than economic principles. However, at least in this sense I can see some consistency.

Just my 2 cents,

Ivin

 
At 6/29/2011 4:19 PM, Blogger Junkyard_hawg1985 said...

My strong opinion is that the trade deficit data is fatally flawed. According to the census bureau, the accumulated trade deficit from 1960-2010 was $7.98 trillion. For 2010, the BEA reports that income payments FROM the rest of the world exceeded income payment TO the rest of the world by $188.3 billion (the highest on record). If we have borrowed a net of $8 trillion since 1960, we should be paying a lot of money out in income payment (dividents, interest, etc). Instead, we are receiving a lot more in interest, dividends, etc than we are paying.

The reason is because our trade deficit data is flawed. Dr. Perry has shown this in previous CD posts for items like the IPhone. Apple manufactures the phone in China, but only a tiny fraction of the import cost is actually paid to Chinese workers. The rest is in Apple's overseas profits. This shows us as a trade deficit, but allows Apple to send money back to the U.S.

 
At 6/29/2011 4:46 PM, Blogger VangelV said...

"I generally do not respond to people who use such insults."


I generally do not respond to people who use such insults.


That certainly makes it easier to avoid the points against your claims.

 
At 6/29/2011 5:31 PM, Blogger Craig said...

If we have borrowed a net of $8 trillion since 1960

Why do you equate an $8 trillion trade deficit with $8 trillion in borrowing. We did not "finance" our imports.

Even if the federal government had run balanced budgets since 1960 (preventing foreigners from buying our debt), the trade deficit figures would not necessarily have changed much at all.

Chronic trade deficits are caused by one thing only -- chonic monetary expansion by the central bank. That has been well-known since the early 1800's. Unfortunately it's become lost knowledge since Keynes wrote his dirty, little book.

 
At 6/30/2011 10:19 AM, Blogger Junkyard_hawg1985 said...

"Chronic trade deficits are caused by one thing only -- chronic monetary expansion by the central bank. That has been well-known since the early 1800's. Unfortunately it's become lost knowledge since Keynes wrote his dirty, little book."

Craig, I do not believe we have borrowed $8 trillion to cover the trade deficit. I don't think we have really had $8 trillion in trade deficits because I think the data is bad.

I think I share your disdane for Keynes. My view is that his economic policy has destroyed more wealth than any other economist other than Karl Marx.

 

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