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Dark Matter Revisited

Friday, February 10, 2006 | 06:55 AM

in Data Analysis | Economy | Science | UnScience

Monday's discussion of the BusinessWeek cover story on "Economic Dark Matter and Why the Economy is Stronger than You Think" generated some buzz -- at least going by all the comments.

Funny thing is, that post hardly discussed the specific problem with dark matter, and instead criticized the misleading way BusinessWeek characterized the issue via its headlines.

Today's online WSJ takes a deeper look at the core issue, in "Is 'Dark Matter' in the Deficit?" Its a great debate about the intellectually intiguing question of why, despite all of the structural imbalances, the US economy hasn't fallen apart. (I manage to get in a few amusing quotes).

Of course, economies don't behave like stocks -- miss a quarterly number, and get cut in half. Macro-Economic issues are, well, macro -- they are bigger, more complex, and take much longer for their full cycles to play out

But the concept of Dark Matter makes for a brilliant and handy excuse for all manner of bad government policies -- Federal deficits, negative account balances, excessive spending, vanishing savings rates, etc. Not to worry, Dark Matter will make up the gap.

Here's the Ubiq-cerpt:™

"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.

If you want to immerse yourself in the wonk-fest that is dark matter, feel free to read the recent paper, by Harvard economists Ricardo Hausmann and Frederico Sturzenegger, identifying the stuff. In a quantum nutshell, their theory is meant 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.

Working backward from the $30 billion, Messrs. Hausmann and Sturzenegger tried to put a value on that dark-matter generated surplus. By using what they thought was a reasonable rate of return on an investment -- 5% a year -- they decided that surplus must then be $600 billion. Thus the U.S. since 1980 has accumulated $3.1 trillion that, if accounted for, erases that $2.5 trillion in debt and then some.

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."

Its a great discussion; I'll ask Mark if they can move the entire piece to the public site.

UPDATE: February 10, 2006 11:38am

This is now on the free WSJ site.

Source:
Is 'Dark Matter' in the Deficit?
Spackle for Economic Anomalies Looks to Explain How U.S. Operates With Massive Debt
MARK GONGLOFF
WSJ, February 10, 2006
http://online.wsj.com/article/SB113952992119570152.html