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Michael Pettis, "Does the UK Benefit From Chinese Investment?,"China Financial Markets, June 5, 2019, https://carnegieendowment.org/chinafinancialmarkets/79261
AI Summary. Foreign investors hold $69tn in U.S. assets against $41tn held abroad, creating a $15tn net liability gap that subtracts $150bn from U.S. investment income for every 1% rise in interest rates — 50% more sensitive than five years ago.
Matthew Higgins and Thomas Klitgaard Liberty Street EconomicsCore argument: The $28tn gap between foreign holdings of U.S. assets ($69tn) and U.S. foreign holdings ($41tn) drives mounting income payments abroad.
Foreign holdings of U.S. financial assets are immense, with official estimates putting their current market value at $69 trillion. U.S. holdings of foreign assets are also impressive but much smaller, at $41 trillion. The shortfall in U.S. foreign assets relative to foreign liabilities has been mounting for decades. Yet U.S. investment income receipts—in profits, dividends, and interest—comfortably exceeded income payments until recently. Payments on U.S. assets owned by foreign investors represent a servicing burden for the U.S. economy. Profits, dividends, and interest payments that would otherwise accrue to domestic investors instead flow abroad. Given the need to sell U.S. assets to finance ongoing trade deficits, this servicing burden seems likely to mount. The related buildup in the U.S. net liability position in interest-bearing assets will also make the income balance more sensitive to swings in interest rates. This increased sensitivity is already in evidence. At present, with the asset-liability gap at -$15 trillion, a 1 percentage point increase in U.S. and foreign interest rates would subtract $150 billion from the U.S. net income balance. (A 1pp fall in rates would result in a similar improvement.) Only five years ago, a 1 percentage point rise in rates would have subtracted $100 billion.AI Summary. The United States current account deficit is not required to supply the world with dollars, because foreign entities can acquire dollar assets by selling financial assets to Americans rather than goods, leaving the current account balance unchanged.
Maurice Obstfeld Peterson Institute for International EconomicsCore argument: I cannot generate the requested takeaways because the source material contains no quantitative data, numerical findings, or comparative metrics. The.
Critics of the dollar's global role have argued that foreign official dollar purchases (labeled US incurrence of official liabilities in the figure) feed one-for-one into US current account deficits. To illustrate the true loose relationship between these two variables, the figure shows both of them over the 2003–25 period, as percentages of GDP. US net incurrence of liabilities to official holders, reported with a minus sign as in standard balance-of-payments methodology, is usually far too small to mirror the US current account deficit. And since roughly 2014, net official financial inflows have fluctuated around zero as the current account deficit has widened. To be sure, the strong international demand for dollars may make the dollar stronger against foreign currencies than it would be otherwise, [but] while they imply a smaller current account balance, they do not necessarily imply a negative balance and certainly not a rising negative balance, especially when foreign dollar reserve holdings have been shrinking relative to global economic activity (as figure 1 also implies). The euro is the world's second reserve currency, yet the euro area has a current account surplus. Britain had surpluses up until World War I despite issuing the world's premier global currency and hosting its leading financial center. Reducing the US fiscal deficit materially and sustainably is the most important US policy prerequisite for global current account rebalancing.AI Summary. Four economies—the United States, China, Germany, and Japan—account for roughly two-thirds of global imbalances, with current account surpluses and deficits now lasting twice as long as they did in the 1980s. Persistent imbalances have accumulated into large foreign asset and liability positions, with the United States holding net foreign liabilities
IMF Staff International Monetary FundCore argument: Surplus durations have doubled since the 1980s, accumulating massive foreign asset positions for China, Germany, and Japan.
Four economies—the US, China, Germany, and Japan—account for roughly two-thirds of global imbalances. The US deficit—equivalent to 4% of GDP as of 2024—has been financed by capital inflows and portfolio investors seeking dollar assets. Germany and Japan’s surpluses have been driven by high saving rates, joined by substantial surpluses in China beginning in the 2000s. Oil-exporting countries’ surpluses fluctuate with commodity prices, creating episodic contributions to global imbalances. In earlier decades, surpluses and deficits were more cyclical: countries moved in and out of surplus depending on business cycles, commodity shocks, and exchange rate movements. While there is no standard definition of persistence, the average duration of a deficit or surplus spell roughly doubled since the 1980s. Persistent surpluses over the past two decades have accumulated into very large net foreign asset positions for economies such as China, Germany, and Japan, with each holding net foreign assets equivalent to 3–3.5% of global GDP in 2024. Similarly, persistent deficits have built up into large net liability positions, most notably in the US where the NIIP stands at about -25% of global GDP in 2024, underscoring the central role of the US position in global balances (Figure 6).
Ed Comment:Obviously, I couldn't agree more. Shocking what a bunch of nitwits many mainstream economists are on this topic. They haven't rethought it since they read it in textbook in college 30 years ago based on thinking from 30 years before that. We let them damage our economy without giving it a second thought. It's too bad petiis can't see straight on inequality. That people have to earn the money before it can be redistributed and if it's redistributed it may never be earned in the first place."....While foreign investment usually benefits developing economies and creates local economic benefits in advanced economies, it generally does not benefit advanced economies on the whole except in very limited cases. On the contrary, foreign investment in advanced economies is more likely to lead to higher unemployment or rising debt....The idea that a country automatically benefits from foreign investment is based on the assumption that productive investment in any country is always constrained by a shortage of capital. That is why when foreigners promise to invest in a country, it is assumed that this will lead to an increase in productive investment. But like many other widely shared assumptions among economists about what is or isn’t good for the economy, this assumption is too rigid. Foreign capital inflows into any country can lead to an increase in productive investment only under certain circumstances. Under other circumstances, these inflows are more likely to lead to either more unemployment or more debt. What matters are the underlying conditions in a given country and, to a lesser extent, conditions in the country from which the investment originates. In fact, as I will show below, while Chinese investment can cause developing economies to grow faster, it is unlikely systematically to benefit the UK or other advanced economies. This extremely unintuitive conclusion seems to fly in the face of many years of policy direction and behavior, but it follows automatically from working logically through the ways in which foreign investment affects recipient countries.The key is to recognize that an assumption that implicitly governs much classical economics—that capital is a scarce resource—while probably true for most of modern economic history is now obsolete, at least for most advanced economies. Because countries like the UK do not suffer from a scarcity of investible capital, the benefits of foreign investment are not nearly what once was believed.... foreign investment inflows, as the obverse of current account outflows, can damage developed economies. Specifically, foreign investment inflows pose two potentially large costs to the UK. First, in the case of foreign direct investment, foreigners may buy British companies to acquire and transfer advanced technology. This may or may not harm British economic growth over the medium term and the long term depending on the specific circumstances, which I probably don’t need to rehash as journalists have discussed this issue quite a bit. The second cost is potentially even greater. Countries that receive net foreign investment inflows, whether direct investment or portfolio investment, by definition will necessarily see either domestic investment rise or domestic savings drop.2 If net foreign capital inflows don’t cause investment to rise in advanced economies like the UK, (and may even cause it to decline if these inflows export consumption demand), they must force down the domestic savings rate. This very important point is almost always misunderstood and so worth repeating. If any country sees an increase in its net foreign investment inflows, there are corresponding changes in three accounting identities which, precisely because they are accounting identities, must occur simultaneously and are simply different ways of saying the same thing: (1) the country’s capital account surplus will rise by the amount of the increase in net foreign investment, (2) its current account deficit will also rise by exactly the same amount, and (3) the excess of domestic investment over domestic savings will rise, again by exactly the same amount. Because the UK is an advanced economy in which investment is unconstrained by scarce capital, the country’s investment level will not rise with an increase in net foreign inflows, in which case its savings must automatically decline, as the gap between the two rises exactly by the amount of the net foreign investment inflow. Economists and policymakers still find it hard to understand how foreign capital inflows can automatically depress domestic savings. But as I have discussed several times before (for example, here, here, and here), there are many ways in which they can do so. These, broadly speaking, always result in either higher unemployment or higher debt, neither of which the UK is likely to see as a good thing.It isn’t a coincidence at all, by the way, that countries with the most open and flexible capital markets and the best financial-market governance (basically the Anglo-Saxon economies) have run permanent or nearly permanent deficits driven by low savings since the 1970s: capital inflows have depressed domestic savings. That is why when analysts argue that their low savings prove that the UK (and similar countries, like the United States) need foreign capital, they have it exactly backwards. If foreign capital does not drive up investment, it must drive down savings. These economies receive the excess savings generated abroad not because they need the money (in which case they would have been driven by rising interest rates) but rather because the excess savings were forced into countries that could best accommodate them (in which case they should drive down interest rates, as they seem to have done). This means that foreign capital inflows into the UK—whether from China, the United States, elsewhere in Europe, or anywhere else—force the UK to accept either rising debt or rising unemployment (or some combination)...."