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October 07, 2005

Reading Around: October 3-6, 2005

Thomas Geoghegan, The Law in Shambles

Pierre-Olivier Gourinchas and Helene Rey (2005), "From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege" (Cambridge: NBER working paper 11563):

Does the center country of the International Monetary System enjoy an "exorbitant privilege" that significantly weakens its external constraint--as has been asserted in some European quarters? Using a newly-constructed dataset, we perform a detailed analysis of the historical evolution of U.S. external assets and liabilities at market value since 1952 We find strong evidence of a sizeable excess return of gross assets over gross liabilities. Interestingly, this excess return increased after the collapse of the Bretton Woods fixed exchange-rate system. It is mainly due to a "return discount": within each class of assets, the total return (yields and capital gains) that the U.S. has to pay to foreigners is smaller than the total return the U.S. gets on its foreign assets. We also find evidence of a "composition effect": the U.S. tends to borrow short and lend long. As financial globalization accelerated its pace, the U.S. transformed itself from a World Banker into a World Venture Capitalist, investing greater amounts in high-yield assets such as equity and FDI. We use these findings to cast some light on the sustainability of current global imbalances.

Aart Kraay and Jaume Ventura (2005), "The Dot-Com Bubble, the Bush Deficits, and the Current Account" (Cambridge: NBER working paper 11543).

Michael Dooley, David Folkerts-Landau, and Peter Garber (2005), "Savings Gluts and Interest Rates: The Missing Link to Europe" (Cambridge: NBER working paper 11520):

Data for world savings rates do not suggest that an aggregate glut of world savings has depressed U.S. and international interest rates in recent years. Unusual but offsetting changes in savings rates have been limited to three regions: sharp declines in the U.S. have been matched by sharp increases for developing Asia and the Middle East. The world saving rate has increased very little. There are two important features of this change in regional savings behavior. First, three-quarters of the increase in Asian and Middle Eastern savings has been placed in international reserves. Second, all these additional savings have been absorbed by the United States. Even if reserves are mostly placed initially in the U.S., we would not expect all the savings exported from these high savings regions to remain in the U.S. A collapse of expected profits outside the U.S. seems to us a compelling explanation for the U.S. current account and depressed international interest rates.

Jeremy Siegel (1998), "Valuing Growth Stocks: Revisiting the Nifty Fifty," American Association of Individual Investors (October):

The lofty levels reached by the Nifty Fifty in the early 1970s are often held up as an example of unwarranted speculation. But a glance in the rearview mirror indicates investors were right to predict that the growth of these firms would eventually justify their [high] prices.

J. Bradford DeLong and Andrei Shleifer (1991), "The Bubble of 1929: Evidence from Closed-End Funds," Journal of Economic History

We present evidence that a substantial component of the rise in stock prices up to and fall of stock prices away from September of 1929 was in fact excessive, and not based on rational revisions of warranted valuations. Our evidence is based on an analysis of the prices, discounts from net asset values, and new issue volumes of closed-end mutual funds during and after 1929. We estimate that at the peak the stock index was more than one-third above its fundamental value. Using a different souce of information--the interest rates charged on brokers’ loans--Rappoport and White (1990) have produced a similar estimate: they estimate, under the assumption that lenders were risk neutral, that at the market’s peak those banks making brokers’ loans thought the market overvalued by one-half.

Posted by DeLong at October 7, 2005 01:13 PM