[OPE-L:7561] [OPE-L:1106] Re: Re: Re: Re: Is anyone there

Fred B. Moseley (fmoseley@mtholyoke.edu)
Fri, 3 Sep 1999 15:37:28 -0400 (EDT)

This is a reply to Duncan. Thanks for your comments.

On Sun, 29 Aug 1999, Duncan K. Foley wrote:

> A few remarks on Fred's interesting papers and posting.
> 1. It's hard to forecast turning points in capitalist economies.

I agree.

> 2. I suspect that the conventional balance of payments accounts
> misrepresent the international balance sheet position of the United States
> and the changes in it because they track only current flows of value and do
> not reflect changes in the values of assets. As a result income and saving
> are understated because capital gains on existing assets are not included.
> (In periods of falling asset prices, income and saving would be overstated
> in the conventional accounts.)
> This defect is particularly troublesome for the U.S. in the current period,
> which is very likely acting as a financial intermediary. Some part of the
> "huge capital flows" measured by the conventional BOP accounts are
> effectively being reinvested abroad through the retention of capital gains.
> The BOP accounts obscure this aspect of the U.S. financial position, and
> make it appear that we are financing an enormous consumption binge off of
> borrowed funds. While there may be some truth in this, the conventional
> statistics overstate the case.

I don't fully understand this. At the same time that foreign assets owned
US investors are being revalued, US assets owned by foreign investors are
also being revalued. You seem be implicitly assuming that that the former
revaluation will be greater than the latter revaluation.

The BEA estimates of the "net international investment position" from 1982
to the present in fact include the revaluation of both foreign assests and
of US assets (and include revaluations for both price changes and exchange
rate changes). Some years the revaluation of foreign assets is greater
and other years the other way around (depending mainly on the direction of
exchange rate changes). But over the entire period since 1982, these two
revaluations have pretty much cancelled each other out, so that the US net
international investment position has not been much affected by these

Am I missing something?

> 4. It looks to me as though U.S. aggregate demand in the 90s has been
> largely regulated by fluctuations in the long-term bond rate. I would be
> more convinced by some evidence that this mechanism is on the point of
> failure than by the BOP flow account ratios.

It seems to me that a flight of capital due to a declining dollar (and/or
restrictive monetary policy to stop it) would increase the long-term bond
rate and in this way reduce aggregate demand. So what I am describing
would not be a breakdown of this mechanism, but rather an example of it.
At the same time, the downturn would be intensified by the effect of a
stock market contraction on consumer spending.

Do we disagree?