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Brad Setser (almost) throws in the towel

Posted by: Michael Mandel on July 03

In my ongoing debate with Brad Setser over dark matter, he comes close to conceding…for the moment:

Paging Michael Mandel. I give up … there isn’t that much to worry about. At least not judging from the 2005 NIIP data.

OK, I am not really ready to give up. But the 2005 net international investment position (NIIP) data sure didn’t provide me much to work with.


….The net international investment position of the US just hasn’t deteriorated since the end of 2002, despite deficits of nearly $525b in 2003, $670b in 2004 and almost $800b in 2005. US net debt was around $2.3 trillion at the end of 2002. And it was around $2.55 trillion (valuing equity investment in the US and US equity investment abroad at market value) at the end of 2005.

Big deficit, sure. But the story that emerges is that the US is just borrowing against the rising value of its existing foreign investments abroad. Just like US households are borrowing against the rising value of their homes. Debt is only a concern if it isn’t backed by assets. External debt matched by rising external assets isn’t a worry.


If the data holds, I pretty much have to concede 2005 to the don’t worry crowd.

Actually, I’m not as much in the don’t worry crowd as Brad might think. I’ve written that there are a lot of potential bubbles out there in the global economy (see here), and we don’t know which one is going to pop first.

My real conclusion: The intricacies of the global economy have now conclusively outrun the statistics. On the physical side, the flows of knowledge are not being picked up by the data. On the financial side, the growing role of derivatives may be making the whole debt/assets division increasingly outdated. It may be time for a big rethink of the whole statistical structure.

Note: 2005 number for net debt corrected at Brad’s request.

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Reader Comments

claus vistesen

July 4, 2006 09:38 AM

'It may be time for a big rethink of the whole statistical structure.'

Exactly Michael ...

I have actually tended to disagree with you concerning the theory of Dark Matter especially because I believe the original source (i.e. the Sturzenegger and Hausmann paper) to be wrong in many of its assumptions. However, the point about statistics of current account flows in the 'knowledge economy' is very valid and thus important to take away from the Sturzenegger and Hausmann paper whereas the idea that the US suddenly has run an actual surplus over the last 25 years is not.

brad setser

July 5, 2006 11:23 AM

Michael -- one small correction. In my initial post, i used the end 04 NIIP at market value for the end of 2005 number. The correct end 05 number is $2.55 trillion, not 2.45 trillion.


my apologies. I have corrected this in my post and it would be great if it could be corrected here as well. It doesn't change the overall story.


July 5, 2006 12:37 PM

Your point about a big rethink of the statistical structure may be correct, but how would you propose we implement such a system? The new structure would have to incorporate "dark matter" in order for a better uptake of knowledge. Any ideas on how to pick up the flows of knowledge in the data?

Mike Mandel

July 5, 2006 03:40 PM


Bill Cristal

July 11, 2006 05:05 PM

Are you related to Toronto Sun columnist Ms. Michele Mandel?

Brandon W

July 13, 2006 09:51 AM

-chirp- -chirp- .... crickets.

It's awfully quiet here... maybe... a little TOO quiet....

Mike Mandel

August 7, 2006 03:15 PM

never quiet in my house

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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