The external wealth of nations

I imagine that for a "layman" it is quite difficult to imagine what the USA, Spain, France, UK and Turkey have in common … They are actually quite different stories, because you can get into debt for a thousand reasons, and you can acquire them foreign business in many ways. However, if getting into debt isn't necessarily bad (otherwise the US and UK wouldn't be in the left column), being net creditors is probably good (at least from a macroeconomic fundamentals point of view, because I don't know if we all would be willing to emigrate to China, the United Arab Emirates, or even simply to Germany).

I wanted to use this data to illustrate some implications of a couple of things we have seen in recent posts (implications I hope not surprising for "older" readers).

I would start from the consequences of internal devaluation , because I promised you to investigate them:

Tomorrow, that is January 6, we did not see it because I had other things to do, but today we can see it. The trend of the real exchange rate of Italy with respect to our main partner is this:

and we expect Italy's foreign indebtedness to mirror, that is, to worsen (to larger negative values) when the country revalues ​​and improves when the country devalues. Indeed, the trend in Italy's net foreign credit position with respect to GDP confirms this hypothesis:

The reason is, as the elderly know, that when the country's real exchange rate is revalued (i.e. when the country's goods become too expensive for foreign buyers, i.e. when the country loses competitiveness), exports decrease, imports increase, and the country must borrow from abroad to finance its purchases of foreign goods (imports). The opposite occurs in a phase of devaluation.

To put the two series in the same graph, we take the annual averages of the monthly data on the real exchange rate:

(correlation coefficient: -0.6, for fans). The graph confirms what we knew in November 2011: the austerity policies ("tightening the belt") have essentially served to repay foreign creditors, i.e. to reduce our (net) debt with foreign countries (i.e. the difference between foreign assets held by Italians and Italian assets held by non-residents). In this sense, that is, with respect to the objective that professional economists know, they have been effective. Compared to the declared objective, on the other hand, that is, with respect to public debt, they have been disastrous, because the public debt has increased, as we have seen many times (for example in Monti's fact checking ), despite some paucisymptomatic economists have not yet understood it .

Another fact that we can put into perspective using the Lane and Milesi-Ferretti database is the formidable exploit of the Irish GDP in 2015, which we saw in the New Year's post :

As some will recall, the case of Ireland has always fascinated me, ever since in December 2010 I told on lavoce.info the moral of the Irish tale , which was very simple: growing with other people's money (i.e. growing on foreign debt) it's very easy, if it weren't for the fact that the bill comes in the end!

In other words, it should never be forgotten that capital does not move to take the dog for a walk, but to get paid. This is true both for those who buy a public debt security and for those who buy a company. Those who are exalted because "foreign capital arrives" (to buy domestic companies) should always remember not only the fact that capital, in today's world, as it arrives, starts again (and it is rather vain to try to stem their outflow, with connected closure of companies, by decree). It should also be remembered that while the capital remains, at least part of its profits go abroad (precisely because foreign entrepreneurs want to be remunerated). I explained this with due delicacy to Marco Spampinato , also on lavoce.info: FDI (ie "foreign capital that arrives because we are so attractive, my lady!") Are not a free lunch : they can also solve a problem, save you a company, make you grow, but they create another one: both the capital account (because they are debt) and the current account (because they involve an outflow of income towards foreign countries) of the balance of payments swoop.

I explained it in more detail by returning to the moral of the Irish tale four years later (when obviously things had gone as I said, not as Spampinato said) …

And then, by re-reading this OECD note explaining the Irish anomaly in the per capita GDP graph, you will also understand the Irish anomaly in the external debt table, that is, the fact that the laughing and green Ireland has the lowest net credit position. in the world in relation to GDP: -182%. Do you want to see the "relocation to Ireland" of "a number of large multinational corporations" which took place in 2015? Here it is, in all its glory:

A nice increase in the stock of passive FDI, that is, direct investments from abroad in the country (in Ireland), which for Ireland are an opportunity, but also a challenge (because it will have to remunerate them).

More generally, -182% of GDP means that the stock of foreign loans received by Ireland (net of loans granted by Ireland) is almost twice the national GDP! The two anomalies therefore go together: the country necessarily grows, if it absorbs such a disproportionate amount of other people's money! The problem is that in the end the account will come (again) (but this can be seen on other statistics, those of the balance of payments, which we will look at another time).

And what is the moral of the moral of the story?

Putting together yesterday's post and today's post, it seems obvious to me: if you're right (and we annoyingly tend to have it) time will give it to you. I understand that it is not always so easy to let time pass, especially when you are in the bad company of some minister who just doesn't want to know what to do , but often there is no alternative.

A little more patience …

(… minus 16 … )