Brad Setser

Brad Setser: Follow the Money

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America’s most successful export industry powers on …

by Brad Setser
July 25, 2005

Ok, housing is not usually thought of as an export industry.  But it sure seems to be doing quite well.

And, as General Glut has pointed out, it is quite possible to securitize the payment stream on mortgage and to export it.  Since the US now exports more long-term debt than goods, shouldn't we start to revise our list of the parts of the US economy that are benefiting most from international trade?

US goods exports in 2004 were about $808 billion.  Gross US "exports" of long-term debt were more like $876 billion.

The port data from Los Angeles suggests that US "goods" exports to the East Asia did not pick up in June.  But I would guess that Chinese demand for US debt stayed strong.   Through May, China had bought $38.4 billion of US debt (short-term as well as long-term; long-term debt purchases were around $29 billion) and only $15.7 billion of US goods.   And China's actual purchases of US debt probably exceeded its recorded purchases — as I never hesitate to point out, there is a big gap between China recorded reserve growth and its recorded purchases of US debt.

Sometimes I hear people ask why "exporters" to China are not a louder voice in the debate over US China policy. 

Part of the answer is that the US doesn't actually export many goods to China.  in 2004, the sclerotic eurozone economies exported far more goods to China than the dynamic, hyper-competitive US economy.  And US goods exports to China, along with US goods exports to the rest of Asia  — are not growing all that fast, particularly this year. China is a big country, but it is not (at least not yet) a big market for US goods.  Boeing aircraft are a bit of an exception, but I suspect that China's (still state-owned) carriers may be shifting away from an almost all Boeing fleet even as India is emerging as a huge market for Boeing.  Politics? 

But the bigger part of the answer is that the sectors in the US that are benefiting from exporting to China — see the Big Picture's nice wrap on housing — don't realize how much of their current prosperity is "made in Beijing."  

How many real estate brokers used their year-end bonuses to lobby Washington to press China to hold on to its peg, and to keep on buying up so much US debt? 

And what would happen if some shock takes the "localized froth" out of the real estate market?   Are today's real estate brokers — along with the construction workers now building homes — the future US manufacturing labor force, as Professor DeLong posits?

26 Comments

  • Posted by Movie Guy

    China is going to cut the deal with the EU on the Airbus if the EU drops the weapons embargo. China explained that it will buy all the production of Airbus once the 1989 embargo is lifted. Whether that is true remains to be seen. The point, though, is that once the weapons embargo disappears, Boeing sales to China will dry up. Poof. More magic.

    Then there is this. Dubai’s Emirates Airlines announced on Monday that “it has signed a $119-million financing agreement with China Construction Bank Corp. for the financing of a new Airbus A340-500.” Worth noting, as we may see more Airbus financing deals coming out of China. Related? Coincidence? How would we know?

    Back to the U.S. problem.

    What the U.S. is left with is the situation of what to do about its global (and Asian) decline in exports as a total share of global exports to the seven economic regions.

    Should U.S. housing roll over, and it may, the dampening effect down the subcontractor chain should be felt. Perhaps severely. Add on top of that the possibility that U.S. auto sales will lag in the fall of 2005 and the first two quarters of 2006. There will be no employee discounts offered on the new models unless the industry is in great difficulty. But we may see them in the summer of 2006 in an effort to clear out auto dealer floorplans.

    Meanwhile, Europe is faced with rapidly rising imports from China. Edward Hugh points out the 19% growth in imports during the first four months of 2005.

    http://more.fistfulofeuros.net/archives/001776.php

    “Imports from China in the first four months of this year…were 19 per cent higher than the same period a year before. Imports from the US remained almost flat at €52.6bn. In contrast, EU exports to China fell by 1 per cent to €15.2bn, while exports to the US rose by 2 per cent…..”

    “China’s economic expansion suggests the rate of growth of exports to the EU is likely to be maintained. By the end of this year, imports from China could be almost three times higher than the level in 1999.”

    The U.S. trade deficit issue is far larger in scope than trade with China. Someone should be discussing the bigger trade picture. It is that important. We are losing the current account battle. And we are losing market share on our exports to all seven regions.

    These are not positive developments. It’s essential that one economist cares enough to discuss these broader matters openly.

    Perhaps a good post discussing the WTO World Trade Report 2005 would allow for a broader discussion.

  • Posted by Guest

    Can one of the tech guys please widen the comment column to match the original page post?

    Thought we sorted this out before…unless someone changed their mind.

    And please then delete this post.

  • Posted by Movie Guy

    Let me correct my above post. In one news report, it stated that China indicated that it would buy all production of Airbus’ new big aircraft, not all its aircraft, if the weapons embargo was lifted. Whether or that is true or not, I wouldn’t know. But it is unlikely, of course, that China would purchase all of Airbus’ total production.

    Here’s a present day analysis:

    “In the next 20 years Airbus will deliver about 1,800 aircrafts to China. It means Airbus will hand over an average of 90 aircrafts to China each year, which represents 11 percent of Airbus’ global annual delivery.

    Mr. Laurence Barron said in Airbus’ brand-new A350 project China would be responsible for 5 percent of the task. The Airbus R&D center Airbus, AVIC1 (China Aviation Industry Corporation I) and AVIC2 (China Aviation Industry Corporation II) jointly set up is scheduled to officially start in mid August in Beijing.”

    http://english.people.com.cn/200507/08/eng20050708_195005.html

  • Posted by brad

    wider column width/ larger text for comments point has been noted, and changes are under discussion. there is a question of consistentcy across the RGE empire and related technical issues. not entirely sure why in some cases the wider screen comes up (i have a wide screen right now) but not in others — the joys of technology. in small windows, i know the default is a three column layout without the google ads. in anycase, i am aware of the suggestion but don’t want to overpromise — if changes come, they will probably come in the context of a broader set of adjustments/ changes. One change is certainly in the works — if you forget the keyword, you should get a chance to put it in, not automatically lose the post.

  • Posted by Stormy

    As noted elsewhere, real estate agents–at least the ones with which I am familiar–are paid commissions at the time of the sale…no year end bonuses, except if you consider the Xmas party a bonus.

    I do not think most real estate agents see a connection between the peg and their sales. They would have to be quite imaginative to do so.

    Walmart, on the other had, would see it immediately. The peg affects immediately their bottom line. They would lobby.

  • Posted by Tom Marney

    I’m a fan of DeLong’s, but “If the Federal Reserve then follows an accomodative monetary policy, workers who lose jobs in construction and consumer services will be able to move relatively smoothly into jobs making goods for export” is definitely the most moronic assertion I’ve read all day.

  • Posted by Tom Marney

    I’m a fan of DeLong’s, but “If the Federal Reserve then follows an accomodative monetary policy, workers who lose jobs in construction and consumer services will be able to move relatively smoothly into jobs making goods for export” is definitely the most moronic assertion I’ve read all day.

  • Posted by Guest

    Are we heading towards the sequel to the S&L Crisis? I hated the first run of the S&L Crisis; I really don’t think I want to see S&L Crisis II. Shouldn’t someone with the power to do so crank up lending standards?

  • Posted by Guest

    Are we heading towards the sequel to the S&L Crisis? I hated the first run of the S&L Crisis; I really don’t think I want to see S&L Crisis II. Shouldn’t someone with the power to do so crank up lending standards?

    For what it’s worth, the site always seems to work great in a Firefox browser. I have never had any problems with it (other than adding comments) and don’t understand the width/larger text posts.

    The site is using php, probably a Linux box, it is to be expected that the techs would focus on an open source browser. I do have to say though, firefox blows away MS internet explorer.

    I am still trying to figure out how to get comments posted. If there is a several minute delay, opps, sorry for all the reposts, but I never saw it show up.

  • Posted by Tom Marney

    I’m a fan of DeLong’s, but his assertion that “If the Federal Reserve then follows an accomodative monetary policy, workers who lose jobs in construction and consumer services will be able to move relatively smoothly into jobs making goods for export” is definitely the most moronic thing I’ve read today.

  • Posted by dryfly

    A trivial anecdote regarding ‘exporting the housing bubble’…

    I was at a party a few years ago… at the party was a very senior “C level” executive with equity position & a board member of a major Midwestern window manufacturer… The spouse of this executive and I had each known the host of this party for 25 years or so. They knew what I did for a living and were always curious to what I was up to so we started chatting about business…

    I had just come back from a business trip to Israel and saw all the building around Jerusalem and asked the executive if they sold many windows, doors & similar components overseas… The reply I got shocked me… “Some but not much, we don’t see much growth potential… only in Europe and Japan can they afford our products and they already have good window manufacturers… their market is pretty saturated too”.

    Now granted the windows these folks produce are VERY nice and VERY expensive… but I have been in a bunch of window plants over the years including theirs and I can tell you it would not be difficult for this company or any of the others to develop an ‘offshore window’ for a number of the markets around the world. Low cost, robust & targeted to the tastes of the home country. Produce the engineered raw materials like the extrusions & composite structures & hardware in their current facilities or at global suppliers then assemble the final products to customer taste on demand at factories in the host country with local (cheap) labor…

    I hinted at this model and was told… “Nope never work… not enough money in the developing world, we could never get our price…” That was in the earliest days of the bubble… and they were already becoming drunk on the growth they were seeing domestically.

    But I couldn’t help but think of all those flats being built in Guangdong, Shanghai, Mumbai, etc… and that even if the margins were lower per window… the numbers were so staggering it wouldn’t shock me if after ten years these companies wouldn’t be making more money off their offshore sales than domestic sales.

    Reading Brads post made me think of this… we are so wrapped up in this bubble we can’t even export the by-products.

  • Posted by JohnHar

    I just don’t get it.

    How are Americans going to pay the mortgages at 33%-50% of their incomes on bubble-level mortgage amounts if the labor/wage situation doesn’t improve? And how can that happen unless we export more? If they can’t pay their mortgages, and savings is so low, how can we avoid systemic bank problems because of foreclosures?

    How does the math to the “soft landing” work out in terms of timing and flow? Is the key to the soft landing scenario argument that a weakening dollar increases exports, then jobs, reduces the CAD, etc? The problem is there are no indications the US is getting more competitive, only less.

    Have we gotten ourselves into an lose-lose scenario where a strong dollar risks wage stagnation and a continuing weakening of our manufacturing base due to lack of global competiveness, but a substantially weaker dollar leads to inflation, interest rate increases, a housing bubble burst, possible banking crises, etc.?

    So I guess I just don’t understand, how does the soft landing actually work?

  • Posted by sun bin

    i think you may want to consider combining column 3 and 4. because no one is viewing google ad now, it is out of most windows (except using 16:9 display). if the ad is not seen, it will not be clicked, and you won’t get the fund needed to run the website.

  • Posted by Guest

    Contrary to an earlier post — the blog actually crashes my Firefox. Works ok in IE. Well, doesn’t *crash*, but causes it to go into an apparently infinite loop in which it uses as much of the CPU as it can get indefinitely and the page never fully loads. Probably I and the earlier poster have different firefox settings. It would be great if the tech guys could do more testing on firefox.

  • Posted by Anonymous

    “is definitely the most moronic assertion I’ve read all day.”

    And by far the most diplomatic and understated comes from Nouriel Roubini:

    “There are financial imbalances,” and Greenspan’s successor will face “a delicate transition.”

    http://www.bloomberg.com/apps/news?pid=10000087&sid=aRPZ32QSutGg&refer=top_world_news

  • Posted by Guest

    yeah i would put “Ads by Goooooogle” under (or above :) the archives! then you could embiggen the main column and raise the font :D

    cheers!

  • Posted by Guest

    “it would not be difficult for this company or any of the others to develop an ‘offshore window’ ”

    http://philip.greenspun.com/business/chinese-rv
    business-plan for chinese-made RVs/motorhomes :D

    cheers!

  • Posted by bsetser

    gotta love the language: “embiggen” … i assure you, that idea is under consideration.

    the system should work fine on firefox, better than with explorer — there were some problems (i gather) with the data base management system last night, hence the long lags in posts and repeat posts. sorry.

  • Posted by stormy

    As noted elsewhere, real estate agents–at least the ones with which I am familiar–are paid commissions at the time of the sale…no year end bonuses, except if you consider the Xmas party a bonus.

    I do not think most real estate agents or brokers see a connection between the peg and their sales. They would have to be quite imaginative and intellectually adept to do so.

    Walmart, on the other had, would see it immediately. The peg affects immediately their bottom line. They would lobby.

  • Posted by stormy

    According to this piece, the peg “move” is the only move for a good while. Looks like a head fake to me. And it is not just some Chinese who want this peg. Think of all those western businesses there.

  • Posted by bsetser

    Allow embedded links.
    Embiggen column/ text.
    New placement for google ads
    Second chance to enter key word, do not automatically lose comments (priority change)
    anything else?

    Substance wise.

    The interest of US firms that use China as an export platform (the majority) differ from the interest of US firms looking to sell to China, whether goods produced in the US or goods produced in China. One wants China to hold the line, the other would win from a revaluation.

    And even if real estate brokers get ongoing commissions, it would not be a total surprise if their commission income went up when i-bankers started spending their year end bonuses — in any case, look at the Big Picture link which goes into the impact year end bonuses had on the US labor market data.

  • Posted by dc1000

    1) is your blog going to be under lock&key once the real subscriptions start?

    2) i beg anyone who cares about whether or not there are true fundamental issues at play here with the real estate boom to check out George Mason Univeristy’s Center for Regional Analysis’s website to see recent reports on the Washington DC economy and its impact on housing. Once you see the statistical comparisons of cities its pretty easy to understand why Washington DC is one of the boomiest boom towns embiggening itself everyday.

    http://www.cra-gmu.org/forecastreports/LeadVirginia-EconomiesofNoVA-July%2022.ppt

  • Posted by DC

    one more thing,

    you touched on something we talked about before i.e. the US DOES export a lot of stuff, its just DEBT instruments (financial capital of the world, financial innovation etcetc).

    SO: when the securitized mortgage debt does get sold to internationals, how does that play in the cap/current accounts?

    we sell the debt, which is really just a contact, so does that impact either the current or capital account?

  • Posted by bsetser

    blog = free. hence the ads.

    MBS sold to foreign investors = increase in foreign claims on the US, and a capital inflow to the US. foreigners are trading dollars, real ones, for a promise by the US to pay dollars — both the coupon and the principal in the future. The inflow finances the current account deficit.

    The US actually is importing not exporting “financial capital” — it is exporting a promise to pay, an IOU. Nothing more. The challenge comes when the US actually has to start paying its IOUs back, not just issuing more IOUs to pay for ongoing deficits (importing more than the US exports) and interest on its existing debt. The principal presumably won’t be paid back for a very long-time, the US will just refinance it … but we will be paying interest for a very long-time, and eventually, that will mean cutting back the trade deficit to cover a growing deficit in investment income (i.e. interest payments on past debt)

  • Posted by Movie Guy

    “eventually, that will mean cutting back the trade deficit to cover a growing deficit in investment income (i.e. interest payments on past debt)”

    It will be interesting to see how that occurs.

  • Posted by Alex

    “China has huge investment needs. If its government is going to lend money, why not finance its own development? ”

    Stiglitz is so wrong its difficult I feel almost indignant that he would make such a ludicrous statement. If I’m not mistaken capex in China is running at 20% of GDP. Improving manufacturing capability at even more outrageous rate is not what China needs.

    This is the global imbalance that Roach seems to enjoy harping about to no end. The Chinese create more industrial capacity and save more money while the US supplies the demand. Of course this means that Americans as a people and a nation must go into deeper and deeper debt to keep the system going.

    Of course the other option is stimulating consumer demand. This too can have perverse consequence. I was talking to a mortgage broker the other day and he told me that he knew a couple that was pulling in $4,000 a month who wanted to buy a $750,000 home.

    I asked if he could get them into that home and he said absolutely no problems. Of course I asked him would they be considered subprime borrowers he answered not at all, they would be considered Alt A.

    Now that’s scary. Some joker at a pension fund who just bought an MBS that’s rated a senior tranche is probably filled with “good loans” like this.

    Thus stimulating consumer demand can also have perverse and unintended consequences, mainly speculative bubbles and the build up of unsustainable debt.

    “The principal presumably won’t be paid back for a very long-time, the US will just refinance it … but we will be paying interest for a very long-time, and eventually, that will mean cutting back the trade deficit to cover a growing deficit in investment income (i.e. interest payments on past debt) ”

    Yes although I do agree that America will eventually scale back its trade deficits I don’t think the American people will do some voluntarily. If you look at most international financial crisises around the world they all occured suddenly. When Russia and Argentina had their problems they simply didn’t decide to curtail expenditures, instead the market forced a decision upon them.

    I think the same thing is true for the US. Our politicians will not rise to the forefront and say “We are living beyond are means and need to substantially cut expenditures and raise taxes.” I could hardly imagine a better way to destroy a political career by uttering something along those lines. Instead as a nation and a people we will continue to borrow until our creditors say enough.

    Another problem of course are the energy and commodity markets. As the Asian currencies rise with the Remimbi those economies will probably begin driving up the price of oil and commodities. Its difficult to see how a trade deficit can narrow (voluntarily) if the price of basic commodities and energy increase.

    I agree Brad there must be an adjustment the only question is this: will that adjustment destroy the US and global economy in the process? Yes most of our debt is dollar denominated but the question is this how willing are foreigners to hold those dollars relative to other currencies if we have “supersized” trade and budget deficits? This almost implies a gigantic dollar printing press run amok.