Is This the Dark Matter…?

… that Ricardo Hausmann referred to, as not being reflected in the US current account balance? This is what the Federal Reserve Chairman and his c0-authors conceded in their working paper on how the preferences of international investors also played a role in enhancing the supply of artificially created high-quality paper based on sub-prime mortgages! 

Looking back on the crisis, the United States, like some emerging-market nations during the 1990s, has learned that the interaction of strong capital inflows and weaknesses in the domestic financial system (emphasis mine) can produce unintended and devastating results. [Full paper here]

To refresh memories, this is what Ricardo Hausmann and his co-author wrote in November 2005:

The bulk of the difference with the official story comes from the unaccounted export of knowhow carried out by US corporations through their investments abroad, explaining why the US appears to be a consistently smarter investor, making more money on its assets than it pays on its liabilities and why the rest of the world cannot wise up. In addition, the value of this dark matter seems to be rather stable, indicating that they are likely to continue to compensate for the measured trade deficit.

Globalization has made the flows of dark matter a very significant part of the story and the traditional measures of current account balances paint a very distorted picture of reality. In particular, it points towards imbalances that are not really there, making analysts predict crises that, for good reason, remain elusive. [Full paper here]

Readers are invited to draw their own conclusions.


Originally published at The Gold Standard and reproduced here with permission.