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 On the financial side, the growing role of derivatives may be making the whole debt/assets division increasingly outdated.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.