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Thursday, October 13, 2005

Gourinchas and Rey and the 'Tipping Point'

Bloomberg's John Berrry has a lengthy and informative piece on the paper by Pierre-Olivier Gourinchas and Helene Rey "From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege". Berry's main point is the following:

The U.S. may be approaching a dangerous ``tipping point'' in its international transactions.

At the end of last year, foreign investments in the U.S. were worth $2.5 trillion more than this country's investments in the rest of the world. Yet last year, those U.S. assets abroad remarkably still earned $30 billion more than the foreign assets here.

That stunning disparity in returns is one of many reasons why the huge U.S. current account deficits of recent years have been so readily financed. The sagging net investment position wasn't being compounded by an ever higher interest bill -- as is the case with the mounting U.S. government debt.

This year the game has changed.

Net U.S. investment income turned negative by $455 million dollars in the second quarter, marking a swift deterioration from a $15 billion surplus in the first three months of 2004.

If this trend continues -- and there's no reason to think it won't -- the U.S. will be paying a steadily rising net amount to foreigners, and those payments will both increase the U.S. current account deficit and worsen the country's net investment position.

This is an important point. But I personally don't think we are at - or anywhere near - that tipping point right now.