Friday, December 16, 2005

The magic of dark matter

To the surprise of many, the US current account deficit actually shrank (marginally) in the third quarter of 2005.
The Commerce Department reported that the deficit in the U.S. current account totaled $195.8 billion in the third quarter. That was down 1 percent from the deficit in the April-June quarter of $197.8 billion, which had been a 0.4 percent improvement from the record deficit of $198.7 billion set in the first three months of the year.

The third quarter figure was below the $205 billion imbalance that had been forecast.
How this happened is of course the big question. The deficit on goods and services grew from -$186.9bn in 2005:II to -$197.9bn in 2005:III -- nearly 6% growth. The surplus on services grew from +$13.3bn to +$15.1bn, but this relatively small $1.8bn improvement was clearly not enough to outweigh the much bigger $11bn deterioration from the goods trade.

The balance on income improved markedly, from -$1.5bn to +$0.5bn, but this is clearly small potatoes, too. The real shift came in the grab bag "private remittances and other transfers", part of unilateral current transfers, which went from -$15.3bn to just -$5.6bn in a single quarter.

Ah, dark matter.
Analysts said payments by foreign insurance firms to settle damage claims stemming from hurricanes Katrina and Rita accounted for most of the improvement.
This is hardly a new phenomenon. In 2004:III the US current account deficit remained steady thanks almost solely to the $4.6bn improvement in "other transfers" associated with Hurricane Ivan. In 2001:III the current account deficit turned around $5.6bn thanks in large part to a $13.0bn turnaround in "other transfers" in the wake of 9/11.

Why talk about Euro-Disney when a major disaster hitting highly insured Americans seem to always do the trick?

28 Comments:

At 1:35 PM, Blogger dryfly said...

No wonder we didn't sign Kyoto... there's good money in Global Warming.

 
At 7:55 PM, Anonymous Movie Guy said...

Good post, G.

 
At 2:46 AM, Anonymous Anonymous said...

"talk about Euro-Disney" links to the Hausemann Sturzenegger piece as planned?
I need help with the connection I guess.
Good catch on where the $10B difference came from. Imagine all those pundits missing it with Ivan and then missing it again with Katrina!
Something must be done to enforce some mental acuity with that bunch. Bring on the whips -that'll make them smart.
So, of the ~$200B damage, half? of it is already processed and we can expect another $10B from foreign insurance companies to show up in the next CAD report? [Just so we can warn the pundits in advance.]
This news is telling me something --is it that the Katrina episode is an histrionic illustration of the entire country's financial picture?
The foreign insurance companies inflows are a small fraction of the total cost of the damage, but they make a statistical difference here. Atleast it registers on the CAD as an improvement. What doesn't show up is the larger remainder of American insurance flows that looked after most of the costs. This has to have made a dent in those companies. This has to have made a dent in our future insurance premiums. But this is not part of the picture which is: the current account deficit. It is not merely an irony that Katrina can "do this trick", but a trick that we can sight the top of the iceberg and ignore the submerged part.
calmo

 
At 7:41 PM, Blogger STS said...

calmo:

Hausemann & Sturzenegger use a hypothetical foreign investment called "Euro-Disney" to illustrate how leveraged American investments abroad are so much more profitable than foreign investments in the US.

Come to think of it, I'm not sure that "Dark Matter" has anything more to it than this: Americans are more aggressive about leveraging their foreign investments than others are.

 
At 11:47 AM, Anonymous Anonymous said...

Ah once met uh hong kong banker what put it this way: AYmurrica were his piggy bank. He made his money in Hong Kong and he sed he kept his money in AYmurrica. He even went so far as tuh say he didn't care if'n he made a dime on what he invested in Aymmurica. Wah, he said he didn't even mind if'n he lost some here, as long as over time he tended to break even on what he put here. He said the big money was tuh be made over seas, but that it took uh mighty heap uh fortitude tuh be u playin' some uh them games. Do ewe suppose AYmurrricans is uh playin' some uh them overseas games and bringin' home they winnin's tuh they piggy bank back home? Could this be uh part uh thuh explaination uh whah folks be makin' less hear on they investin'? They got their rational expectations set diffurnt like in AYmurrica. Mebbe. Ah remember one feller what used tuh describe ratonal investment strategy this'a'way: first, solvency, then minimum yield, then profit maximization. Mebbe these folks is just uh gettin' they solvency needs ensured in AYmurrica, whilst they meetin' they minimum yieldin' and profit maximizin' needs o'er the big ponds.

De-pairenthetically your'n,
Corporal Glutt

 
At 11:47 AM, Anonymous Anonymous said...

Ah once met uh hong kong banker what put it this way: AYmurrica were his piggy bank. He made his money in Hong Kong and he sed he kept his money in AYmurrica. He even went so far as tuh say he didn't care if'n he made a dime on what he invested in Aymmurica. Wah, he said he didn't even mind if'n he lost some here, as long as over time he tended to break even on what he put here. He said the big money was tuh be made over seas, but that it took uh mighty heap uh fortitude tuh be u playin' some uh them games. Do ewe suppose AYmurrricans is uh playin' some uh them overseas games and bringin' home they winnin's tuh they piggy bank back home? Could this be uh part uh thuh explaination uh whah folks be makin' less hear on they investin'? They got their rational expectations set diffurnt like in AYmurrica. Mebbe. Ah remember one feller what used tuh describe ratonal investment strategy this'a'way: first, solvency, then minimum yield, then profit maximization. Mebbe these folks is just uh gettin' they solvency needs ensured in AYmurrica, whilst they meetin' they minimum yieldin' and profit maximizin' needs o'er the big ponds.

De-pairenthetically your'n,
Corporal Glutt

 
At 5:21 PM, Blogger jasper emmering said...

Those dark-matter-guys never stated the obvious in their article: that US investors go overseas for high-risk and high returns, while foreign investors go to the US to play it safe. They have high-risk at home.

Furthermore, they talk about the goodwill and expertise inherent in American brands like Disney but they forget to deal with the fact that Europe and Japan have got tons of brands themselves. The Chinese, not so much.

Finally, they forget that the US will have to pay its debt to the world and then allow the world to use this money to buy lots of US stuff. My guess is that them furriners will get a higher return on whatever US investments they are going to buy then on what they're currently getting on their T-bills.

 
At 7:59 PM, Blogger dryfly said...

dark matter = cold fusion

 
At 4:00 AM, Blogger Epimethee said...

just for the sake of the argument.
Euro Disney is the worst pick possible for an example. It hardly has made more profits than losses since its creation. And it has received tons of public subsidies to keep it afloat...

 
At 9:12 AM, Blogger vader_jg said...

Corporal

I am a mere camp follower and respect a true economic soldier.

But I must question if the 'solvency needs' them furriners are satisifying, are real or perceived?

In any case, it would be a form of insurance and could be part that dark matter. OTOH, lots of folks on the Gulf Coast thought they had a certain value in insurance that was not there.

 
At 7:32 PM, Blogger dryfly said...

So then can I claim 'dark matter' as collateral againd a huge debt to buy a McMansion or has it all been claimed already?

 
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At 3:42 PM, Anonymous Anonymous said...

Thanks for cluing me in sts (I have no good excuses --whip me). The dark matter is still fermenting for me but I am inclined to think this is a serious attack on BEA accounting methods. My inclination is to draw more inferences from the current rules in the same manner as H&S.
U B so right Eustice (I cannot manage without parentheticals) [It is a small fault --I am willing to trade for more conventional spelling.]
calmo the trader

 
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