Ricardo Hausmann and Federico Sturzenegger have written several pieces (2, 3)on the dark matter in international investments for the US, which support the current account deficit of the US. Dark matters are technology know-how, liquidity service, and unaccounted insurance in the US economy and they provide extra return on the US assets held abroad.
Ellen R. McGrattan and Edward C. Prescott provides a theoretical model to explain the effect of dark matters in terms of technology capital (Know-how, brand names and R&D etc.) but these authors argue that there is no need of real differentials in technology capital, wherever the US openess to FDI matters to the accounting return differentials for timing of in-wards/out-wards FDI through the accumulated stock differentials of plant-specific intangible capital investment. This timing difference alone can explain 60% of the BEA accounting return differential. The McGrattan-Prescott model thus basically partially eliminated the advantage embeded in the US economy argued by Hausmann and Sturzenegger, and therefore dampen their optimism on the sustainability of the US current account, which is a kind of crucial for the current world wide financial crisis.
Magnus: China Must Reform or Bust - China's debt markets are looking more and more like the West, circa 2007. And it's not clear the government can intervene as successfully.
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