What’s wealth got to do with it? Global balance sheets and US geo-economic power

Does the ever-increasing stock of cross-border asset holdings pose a threat to macro-economic stability and to US geo-economic power? Recent analyses suggest that exchange rate changes might drive massive changes in net asset positions that in turn create equally large wealth effects. These wealth effects might compromise US macro-economic policy. In contrast, this manuscript argues that these fears are misplaced. Income flows are the dog that wags the asset tail. Those income flows in turn derive from differences in national growth rates and in the ability of firms to capture profit from global value chains. Expectations around these flows validate asset values. Attention should therefore focus on the source of flows and control over flows, particularly profits, rather than on asset stocks, which are a dependent variable. Although wealth effects driven by exchange rate changes are large, other routine changes in flows and expectations have similar or larger effects on the stock of wealth.