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Plunder - Portfolio Investment

 
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PostPosted: Fri Oct 24, 2014 12:09 am    Post subject: Plunder - Portfolio Investment Reply with quote

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http://www.washingtonpost.com/blogs/wonkblog/wp/2014/05/05/u-s-businesses-are-being-destroyed-faster-than-theyre-being-created/

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U.S. has plundered world wealth with dollar: China paper
Oct 24, 2008

Plunder: to rob of goods or valuables by open force, as in war; despoil, or fleece; to take wrongfully, as by pillage, robbery, or fraud; loot.

BEIJING (Reuters) – The United States has plundered global wealth by exploiting the dollar’s dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said.

“The grim reality has led people, amidst the panic, to realize that the United States has used the U.S. dollar’s hegemony to plunder the world’s wealth,” said the commentator, Shi Jianxun, a professor at Shanghai’s Tongji University.

Shi, who has before been strident in his criticism of the U.S., said other countries had lost vast amounts of wealth because of the financial crisis, while Washington’s sole concern had been protecting its own interests.

Shi suggested that all trade between Europe and Asia should be settled in euros, pounds, yen and yuan, though he did not explain how the Chinese currency could play such a role since it is not convertible on the capital account.

My comment: The U.S. has benefited enormously from globalization, i.e. open markets, free trade, and unrestricted capital flows, along with the dollar being the predominant world’s currency, while our trading partners benefited much less from their anti-globalization policies.

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BenAround:

As the author points out this is a highly speculative exercise. The difference between cumulative current-account deficits and the net IIP is in fact largely explained by valuation changes, especially now that direct investment positions are measured on a market value basis. I’m fairly sure that missing assets and liabilities uncovered in later surveys would be at least partly allocated to prior period financial transactions during the subsequent revisions.

Also, errors and omissions (statistical discrepancy) have been largely positive in recent years, indicating a cumulative shortfall of financial inflows to the U.S. relative to financial outflows from the U.S. This suggests that U.S. financial assets abroad are overstated relative to foreign financial assets in the U.S. Other things equal, this would tend to overstate the U.S. investment income surplus, primarily by understating the deficit on portfolio investment income.

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PeakTrader:

BenAround, if U.S. financial assets abroad are overstated, and foreign financial assets in the U.S. are understated, that means U.S. financial assets are actually earning even higher returns abroad.

The income flows show U.S. investments abroad earn about twice the return than foreign investments in the U.S..

And, if foreigners are investing more in the U.S., and paying a higher price for U.S. assets, compared to the U.S., that would add to the U.S. investment surplus.

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BenAround:

Correct that the U.S rate of return on assets held abroad is much higher than the foreign rate of return on U.S. assets. However, that is entirely due to direct investment rather than portfolio or other investment, which combined are much larger than direct investment.

Returns on direct investment are based on direct reporting by U.S. multinational companies on BEA surveys. Returns on portfolio and other investment, however, are derived by applying average effective yields to financial positions, rather than by direct income reporting. As a result, over/under statements on positions lead directly to over/under statements on income flows. (Effective yields on portfolio and other investment are about the same for both U.S. and foreign residents.)

An overstatement of U.S. portfolio assets abroad relative to foreign portfolio assets in the U.S. will lead to an understatement of the U.S. portfolio investment income deficit, which is already quite large. This would be an offset to other factors that might tend to reduce the current account deficit.

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