Is 'Dark Matter' in the Deficit

The Wall Street Journal ^ | February 10, 2006 | Mark Gongloff

[Paul Ross]

Physicists for decades have used "dark matter" as Spackle to fill pesky anomalies that seem to defy theories about gravity, the Big Bang and more. Recently, economists have proposed a similar fix for apparent anomalies in U.S. economic data. Unlike dark matter in space, dark matter in economics is a concept that has been mostly derided by other economists. If it's real, though, it might be no joke for investors.

Harvard economists Ricardo Hausmann and Frederico Sturzenegger, [advance] a theory to explain something that has bugged economists and investors for years: A persistent trade deficit has built up a mountain of U.S. debt, taking America's balance sheet from about $400 billion in the black in 1980 to about $2.5 trillion in the red in 2004. When Average Joe is up to his eyeballs in debt, he sacrifices his income to whittle away debt. Uncle Sam, on the other hand, still nets about $30 billion more a year on his foreign investments than he shells out to foreigners in debt service and other payments.

Dismal scientists have long warned that this affront to the natural order can't be sustained, that the U.S. must pay off its debts, suffering all manner of horrors, including a hobbled economy and weaker U.S. stocks, bonds and dollars. But that day of reckoning hasn't come, and Messrs. Hausmann and Sturzenegger think they know why: The U.S. has a vast, imaginary asset -- dark matter -- that not only wipes out its debt but provides a surplus that generates that $30 billion a year in investment income.

[Paul Ross]

And, what is this dark matter? Mostly, the Harvard researchers say, it is simply a deep well of good old American know-how -- the consistent ability to export, say, Kentucky Fried Chicken restaurants to Moscow that are more appealing and profitable than Rasputin's House of Chicken and Waffles. According to this theory, foreigners have been pouring money into the U.S. in hopes of tapping that well again and again.

The reviewing article, however, does a good job of questioning the existence of Dark Matter

To many economists and investors, this notion smacks of a desperate effort to ignore a dangerous mountain of debt. The U.S. ability to export Euro Disneys and KFCs already turns up in international trade and profit data, they say, and is still not enough to make up for America's reliance on cheaply made foreign goods. As the article notes:

"Think about what a fabulous excuse that is for anything," said Barry Ritholtz, chief investment officer at Ritholtz Capital Partners. "'I wasn't doing 80, officer, I was doing 55. It's the dark matter that was doing 25.'"

The article also points to an area of general consensus:

Some sources of dark matter aren't so controversial. One is the greenback's position as the world's reserve currency of choice. By providing the Monopoly money used by investors and central banks around the world, the U.S. supplies liquidity and almost certainly gets some investment benefit in doing so. The U.S. also invests in risky developing-market debt, for which it gets a bigger return than foreigners who buy safe, stodgy U.S. Treasury bonds.

This is without question a viable partial explanation. But it is only partial...and it is certainly not an eternal set of circumstances. China is already moving now to successfully supplant the U.S. and the Dollar in Iran, in Venezuela, Panama, and Brazil... teasing with Saudia Arabia, and a number of other nations. Hence the Yuan is being positioned to replace the Dollar as the stable international reserve currency. Hence China will suddenly get those benefits while the U.S. crashes and burns.

Other critics from the article make strong points:

Goldman Sachs's Ed McKelvey and other economists have questioned several aspects of the dark-matter theory, including the assumptions Messrs. Hausmann and Sturzenegger used to "discover" dark matter and their guesstimates about its accumulation from year to year.

And then it is noted that even if the notion of dark matter had some validity...other critics note it just isn't enough:

Assuming Mr. Hausmann is correct, says Brad Setser, a former Treasury economist and head of global research for the Roubini Global Economics Monitor Web site, the U.S. still isn't accumulating enough dark matter to keep up with the growing trade deficit. Messrs. Hausmann and Sturzenegger estimate that dark matter grew by $559 billion a year between 2000 and 2004 -- its fastest pace in the past 25 years. On average, annual dark-matter growth has been about $124 billion in the past quarter-century, according to the Hausmann-Sturzenegger study. Meanwhile, the U.S. is on track to accumulate nearly $1 trillion in debt in 2005. At such rates, America's tank of dark matter will be drained quickly.

[Brilliant]

Interestingly enough, there is an article in Sciencedaily today which explains that some Chinese scientist has proposed that Einstein's theory of general relativity be modified slightly, and that if that's done, then there is no "dark matter."

[Sonny M]

bump.