Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
Upside of Inequality Oxford Unintended Consequences

AI Summary. Japan, China, South Korea and Taiwan together hold just under $30tn in gross foreign assets, a five-fold rise over two decades, and about $10tn in net foreign assets. The author argues a current account surplus dominated by investment income, which tends to be reinvested abroad, generates less currency appreciation pressure than one driven by trade.

Udith Sikand Gavekal
Date Posted:

Northeast Asia’s ~$10T in net foreign assets would yield $400B annually at 4%, versus its ~$600B mean current-account surplus. Unlike export earnings, much investment income is reinvested abroad, creating less appreciation pressure.

Does investment income create less currency appreciation pressure than trade surpluses?

Core argument: Japan, China, South Korea and Taiwan together hold just under $30tn in gross foreign assets, a five-fold increase over the past two decades, with net foreign assets of about $10tn after liabilities to foreigners.

Japan, China, South Korea and Taiwan now hold nearly US10T net. At a 4% return, those net assets would generate roughly $600B over the past decade. The composition matters for exchange rates: exporters typically convert more of their foreign earnings into local currency to meet domestic costs, while foreign investment income is more likely to be reinvested abroad. A current-account surplus increasingly driven by investment income therefore creates less appreciation pressure than an equivalent trade surplus.

Takeaways by Macro Roundup® AI

  1. Japan, China, South Korea and Taiwan together hold just under $30tn in gross foreign assets, a five-fold increase over the past two decades, with net foreign assets of about $10tn after liabilities to foreigners.
  2. At the current 4% federal funds rate, $10tn of net foreign assets would imply roughly $400bn a year in net investment income for the four Northeast Asian economies, against a combined current account surplus averaging about $600bn over the last decade.
  3. A current account surplus dominated by investment income generates less appreciation pressure than one dominated by trade, as exporters are more likely to repatriate and convert dollar earnings to cover domestic input costs while investment-income earners are more likely to reinvest abroad.

Related Articles:

  • Understanding Global Imbalances — The US, China, Germany, and Japan account for roughly two-thirds of global current account imbalances, with the US deficit at 4% of GDP financed by capital inflows into dollar assets. The average duration of a surplus or deficit spell roughly doubled since the 1980s, building large net foreign asset and liability positions.
  • Who Will Win The War Of Neo-Mercantilists? — China's manufacturing export surplus is around 2% of world GDP, roughly twice the largest surplus Japan ever ran, while domestic demand has stalled. Unexplained negative net income of about $125bn on its $4tn in net foreign assets, versus an expected $100bn surplus, supports the argument that the renminbi is about 30% undervalued.
  • The Real Problem With Global Trade — Asia's $1.5tn trade surplus is larger as a share of world output than at any point since 1945 and is the only large surplus in the global economy. Exchange rates have a meaningful impact on trade balances: China's surplus reached about 10% of its output amid renminbi depreciation, then fell below 2% after a 40% real appreciation.
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