Moon of Alabama Brecht quote
January 24, 2009
Where Do These Surpluses Come From?

The Economist via Paul Kedrosky is discussing the imbalance of the global economy and includes this tale of a miracle:

In 1996, the year before the Asian financial crisis began, economies designated by the IMF as emerging, developing and newly industrialised ran a collective current-account deficit of $78 billion. Over the next decade this turned into a surplus of several hundred billion dollars (see chart 1), with China and oil exporters accounting for almost all of the increase in the past three or four years. Much of the turnaround is mirrored in a widening American deficit. (The world’s sums do not add up. Statisticians are unable to offset the recent burgeoning surpluses with deficits elsewhere: according to the IMF, in 2007 the surpluses exceeded the deficits by $265 billion.)

So in one year alone $265 billiones surplus were somehow created out of nowhere?

If anyone has an idea how that works please let me know. It certainly would help to pay the rent.

Comments

The term for this is “creative accounting”.
One of the reasons given against government regulation of financial markets is that it would “stifle innovation”.
Unfortunately, many of these “innovations” were merely sleight-of-hand techniques to make balance sheets look a lot more positive than they really were.
It’s sort of liek the question “Where do the holes in our clothing come from?”. Just look at all the piles of dust in the corners of your room, whose were once part of your clothing.
WHere does bad debt come from? Just look at the discrpancies between stated and actual worth on bank balance sheets. But these holes can not be covered over with an iron-on patch.

Posted by: ralphieboy | Jan 24 2009 11:51 utc | 1

Creative accounting? What about the subterranean economy (ie. the Drug Tade). After all, Bush was a poster child for the latter.

Posted by: Maracatu | Jan 24 2009 15:03 utc | 2

My conviction is that everything that is passed as “data” is ficticious. Does any one actually believe that the population of India or China is known? Does anyone believe that the”growth” in China may go from 14% to 6% in a single year? What are reserves? Why are there emerging nations and not submerging nations e.g. the USA the UK the EU? Isn’t everything propaganda?

Posted by: jlcg | Jan 24 2009 15:11 utc | 3

A lot of the growth in least-developed countries would not show up because of the big informal economy and measurement problems. Capital flight would go unnoticed there too. But not 30% of the surplus.

Posted by: …—… | Jan 24 2009 16:02 utc | 4

Fraction Reserve Banking

Posted by: Ognir | Jan 24 2009 17:12 utc | 5

The other aspect is that companies, especially banks, are proud to show off their assets while they make every effort to conceal their debts.
Until that lump under the carpet gets too big to ignore any longer…

Posted by: ralphieboy | Jan 24 2009 17:27 utc | 6

The Moon?

Posted by: Cloned Poster | Jan 24 2009 18:03 utc | 7

Probably the same methods are used for Dubai’s books

Posted by: Obelix | Jan 24 2009 18:30 utc | 8

intersting mechanism:
Creative Accounting producing Submerging Nations

Posted by: rudolf | Jan 24 2009 19:00 utc | 9

What about the subterranean economy
That’s what the Italian government claims keeps Italy up when the official economy slumps:

One factor cushioning the blow is a black economy so vast that Civil Service Minister Renato Brunetta estimates Italy’s economy is 20-30 percent larger than officially stated.
“When things aren’t going very well and we appear to be in crisis, in reality the crisis is not so bad because Italians sort themselves out,” he told one radio interviewer.”

Posted by: b | Jan 24 2009 19:59 utc | 10

I just read in the Daily Prophet that it is the work of a couple of rougue wizards from Hogwarts who are responsible — no worry, the Ministry of Magic is looking in to it!

Posted by: Chuck Cliff | Jan 24 2009 20:08 utc | 11

It was invested with Madoff but he is indisposed at the moment so it is temporarily off balance. Meantime the SEC encourages calm since – to quote a high-level spokesman – every cent is accounted for and we are encouraging full transparency.

Posted by: Fred | Jan 24 2009 21:02 utc | 12

Observations I’ve made during my working life show that in the U.S. if you earned your MBA before the mid-1950s there’s a good chance the financial information you produce is accurate and can easily be supported.
After that, it gets iffy. By the time as early as the late 60s, a classical accounting degree had almost become unemployable (except for small businesses). New terminology evolved to sort of “force” the figures to balance out and look good.
I did not fit that mold, so eventually I switched to small business accounting only.

Posted by: TheOldOne | Jan 25 2009 0:44 utc | 13

Fiction Reserve Banking

Posted by: DM | Jan 25 2009 5:02 utc | 14

China printed the money. Others did to but not to their extent.
WalMart buys $1000 of widgets from Chen’s Widget Co
Chen take the $1000 to the local bank and exchanges for RNBs
Local bank does the same with the Central bank.
Chinese Central bank takes $1000 and buys T Bonds
In $1000
Out $1000 equivalent RNB
$1000 for T Bonds
or out $2000
China printed the RNB. Thus doubling the total amount of money.
This is sloppy and a crude approximation of this. I do not pretend it explains all the inequalities in the ledgers entries for surplus vs deficit.
Remember there is no RNB external to China. Thus no way for China to sterilize the transaction by buying the RNB’s it gave to Chen. Even if they wanted to. Which they did not. By sending the money back to the US as a loan it only spured more demand for Chen Widgets. They just printed the RNBs
The World Bank estimated world money doubled from 2000 to 2008. I have no clue if this is close to right but at any rate global monetary expansion was stupendous during the period. Far more than can possibly be explained by simple money creation via fractional reserve banking systems.

Posted by: rapier | Jan 25 2009 6:59 utc | 15

Don’t I get a prize or something? A gold star?

Posted by: rapier | Jan 28 2009 14:15 utc | 16

Don’t I get a prize or something? A gold star?
Only if you start to understand the difference between asset and debt from the view of the Chinese Central Bank and then give it a retry.

Posted by: b | Jan 28 2009 16:09 utc | 17

I’m all ears. I’ll keep in mind that the $1000 is a debt, a obligation on the Treasury. So shoot.

Posted by: rapier | Jan 29 2009 1:41 utc | 18