Abstract
Does the ever-increasing stock of cross-border asset holdings pose a threat to macro-economic stability and to US geo-economic power? Recent analyses suggest that exchange rate changes might drive massive changes in net asset positions that in turn create equally large wealth effects. These wealth effects might compromise US macro-economic policy. In contrast, this manuscript argues that these fears are misplaced. Income flows are the dog that wags the asset tail. Those income flows in turn derive from differences in national growth rates and in the ability of firms to capture profit from global value chains. Expectations around these flows validate asset values. Attention should therefore focus on the source of flows and control over flows, particularly profits, rather than on asset stocks, which are a dependent variable. Although wealth effects driven by exchange rate changes are large, other routine changes in flows and expectations have similar or larger effects on the stock of wealth.
Notes
Acknowledgements
The author thanks Randal Germain most of all, and also Iain Hardie, Sylvia Maxfield, Anastasia Nesvetailova, Ronen Palan, Tina Turner and the anonymous reviewers for comment and criticism, but takes responsibility for the gratuitous cultural references and the absence of boring academic prose.
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No potential conflict of interest was reported by the author.
Notes
1 For consistency and clarity ‘stock’ in this article indicates a quantity of a given financial asset or assets at a point in time, and ‘equity’ or ‘equities’ indicates ownership of shares in publicly held companies. I will not use ‘stock’ in the vernacular US meaning of equities.
2 That said, riskiness is neither always readily apparent nor honestly reported. Triple A rated mortgage backed securities and collateralized debt obligations were at the heart of the 2008 global financial crisis.
3 Note also that ‘flows into the US’ do not have an unambiguously positive impact. By accounting definition, net positive investment flows imply a current account deficit, which is a subtraction from GDP.
4 Author’s calculation from stat.BIS.org data. The eight countries with data available are Belgium, Britain, France, Germany, Italy, the Netherlands, Spain and Sweden. These comprise a non-trivial and diverse set of EU economies.
5 The FG2k are the 2000 largest firms in the world based on sales, profits, market capitalization and assets. For the selection methodology see Scott DeCarlo, ‘Methodology: How We Crunch the Numbers,’ Forbes, 4/18/2012, p. 36.
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Herman Mark Schwartz
Herman Mark Schwartz is Professor of Politics at the University of Virginia. He is author of In the Dominions of Debt (Cornell, 1989), States versus Markets (MacMillan, 2018) and Subprime Nation: American Power, Global Capital, and the Housing Bubble (Cornell, 2010), plus four edited books and over 60 articles and chapters. Website: http://www.people.virginia.edu/∼hms2f.