Is there a digital world out there not been caught by traditional measures of GDP? It is a mind bending concept, but a very interesting one. Measuring GDP has been a family pastime- my grandfather produced the first estimates of UK and Soviet Union GDP in the early 1930s and 40s - which from memory included counting the number of tractors among other things. The question I wonder about is how do you correctly measure digital activity. If a Japanese Youtuber earns advertising revenue from Brazil via a US Corporation, but headquartered in Ireland for tax purposes - how exactly is that activity measured? And does it belong to any nation, or does it exist solely in a digital ether? The first hint that perhaps GDP is not capturing activity comes from US financial assets. There is no question that US corporates dominated the digital world, and while the activity could happen in an unmeasured ethereal nation, the profits are definitely reported by US corporates.
If we look at US net worth to GDP, we can see that since the mid 1990s, when the internet was first popularised, there has been a steep rise in net worth to GDP. From 1950 to 1990 or so, US household net worth was 350% of GDP. Today it hovers around 550%.
Typical analysis would assume that the assets are overvalued, and it easy to make that case. But lets assume markets are correct (which is always the best place to start in my opinion) - we could say that this implies there is 17 trillion of missing GDP. For me, I find this an interesting calculation. In a post from a few year ago, I wondered where the missing NIIP was? Net International Investment Position is measure of a countries net position in investment terms. It captures investing inflows and outflow, as well as valuation and currency moves. As it is a net number, and is done globally, theoretically is should add up to zero. But it doesn’t. And in recent years this missing NIIP has been expanding rapidly. This is an slightly out of date chart - US NIIP is now negative 22.5 trillion.
This NIIP gap has gotten progressively bigger over the years.
I first became interested in NIIP as they seemed a good timing tool for when an currency or a nations assets were getting overvalued, but it has not worked with the US in recent years - because maybe the investment is not really into the US, but into a digital world. The other way we can easily see and value a digital world is of course crypto currencies. There are no gold reserves, military or even land to support these assets - but the market gives them value. An estimate of their total value today is USD 4 trillion, larger than most stock exchanges outside of the US. It has value plainly - but where is the associated GDP?
Certainly crypto has some correlation to a digital world, but how exactly is still a mystery to me. Is it a useful currency for a world that is detached from the real world? The value of crypto is now higher than the amount of US dollars in circulation. That would seemingly imply a level of activity greater than US GDP?
One big problem with the digital world is that it is in corporates and certain governments interests to divert digital flows to avoid tax - with Ireland being a world leader here. Using WTO data, we can show the 10 largest digital exporting nations. On digital exports Ireland is the third largest nation, while on an import basis, it is almost as large as the US.
If we take nations like Canada it has USD80bn of exports, and Israel has USD63bn, which both pale in comparison with Ireland USD328bn of exports. Also unusually, Ireland is a net importer of services. WTO provides a breakdown of Canadian digital sales to show that exports would be only 20% of total sales. To me, this implies that about USD300bn of Irish exports and another 300bn of imports have been moved there from the US for tax avoidance purposes.
On a combined import/export basis, Ireland 60% the size of a digital US, larger than India, and roughly equivalent to the UK. The implication for me is that there is certainly a large amount of activity that passes through Ireland, that should really be passing through the US and the Europe. If you think that total US exports is USD 3 trillion, Ireland is doing 300bn of that in very high margin software business, the scale of missing activity becomes clear. If US as whole has 30trillion of GDP with 3 trillion of exports, 300bn of software exports from Ireland could be worth 6 trillion in GDP (adjusting for high margin). Assuming Ireland is not the only tax avoidance centre for digital corporates, perhaps USD 10 trillion of activity is not being caught in traditional measures? That would be a Germany, Japan and India size GDP. Adding that back to US GDP, would then put the US at 40 trillion GDP. That would be US net wealth to GDP at 4 times GDP - a level last seen after the GFC.
Even though I love macro indicators above, when macro and market disagree I bow to markets. Markets always know before macro does, and they are saying the “offshore” digital economy is much larger that we realise.
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