Remittances as a Secret Sovereign Wealth Fund

In a stylized-but-good-enough model of global capital flows, there are three things people can do with their money: they can consume, they can directly or indirectly invest in real assets at home, or they can buy financial claims abroad.

This framework vastly oversimplifies things, but it’s a helpful way to think about every country’s economic model. China, for example, leans heavily towards investment — gross fixed capital formation is 43% of their GDP, compared to 20% in the US. Historically, they invested heavily in financial claims, particularly US treasury bonds and agency securities, but that surplus has been trending down, from 4% of GDP in 2010 to 0.4% of GDP last year.

It’s a quick way to resolve some burning economic questions, like: how can Japan survive chronic fiscal deficits, and government debt of 238% of GDP?

Answer: their debt is mostly funded internally, and they’re net creditors to the rest of the world. When Japan runs a deficit, Japanese savers are directly and indirectly buying the debt. In terms of the country’s change in external liabilities, a deficit funded by internal demand for bonds is exactly identical to a government that cuts the deficit to zero by taxing bond buyers. In that model, their sales tax increase is just a way to shift the “tax” burden from savers to spenders.

This stuff is all comparatively easy to track. A country running a trade surplus is accumulating claims on future cash flows from other countries; any…