Posted on Wednesday, April 19th, 2006
By bsetser
Taylor seems to really think his under his watch, the "Bush Administration ended the bailout habits of the IMF"
As Taylor notes in the Journal, the Taylor-led US Treasury did say no to Argentina in late 2001. But Taylor said no in December of 2001 only after saying yes to a horribly ill-conceived augmentation (increase in IMF lending) in the summer of 2001.
The IMF has stated that it intends to stick to its access limits. Of course, it also has a policy that allows it to go over its access limits whenever it and its major shareholders decide they want to. And every time a big emerging economy gets into trouble, they want to. The IMF hasn't given out any big loans recently, tis true. But that is because no one has gotten into trouble, not because the IMF and its big shareholders have stuck to the stated lending limits under pressure.
Right now, the market in its wisdom will throw oodles of money at any emerging economy that offers a bit of carry. Capital flows are back at their pre-Asian crisis peak.
As for Taylor's real record, I think the facts speak for themselves. He approved a large augmentation for Argentina, and large loans for Turkey, Uruguay and Brazil.
Look at the following graph. The first peak in IMF loans outstanding occurred in late 1998 and early 1999, after Asia, Russia and Brazil all turned to the Fund. The second peak occurred in 2003, under John Taylor's watch. IMF loans outstanding went from say $60b to $100b. The IMF actually lent out more during that period to Argentina, Uruguay, Brazil and Turkey, but Russia and some Asian countries were repaying the fund over that period.
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Posted in emerging economies | 15 Comments »
Posted on Wednesday, April 19th, 2006
By bsetser
So says Michael Mandel.
Some of us might say you can't put dark matter in a container because it doesn't really exist.
That is not Mandel's argument. He believes in dark matter, though apparently not in the container revolution.
Call me old economy. Like William Polley, I suspect that containerization was a big deal. Without the efficiencies created from factories in China to container ships to Long Beach to distribution centers to trucks to big boxes that Americans willingly drive miles to get too, lots of goods would cost more. Walmart - one of Mandel's favorite companies - wouldn't be Walmart without the container.
Actually, call me old economy and old accounting. I don't buy the case for dark matter.
Not after reading Daniel Gros.
Daniel Gros notes that if you believe in dark matter, you have to believe that the US has systematically taken foreign investors to the cleaners.
Remember, dark matter arises not because the return on US foreign direct investment is particularly good, but because the return on foreign direct investment in the US is terrible. And since most FDI is the US comes from Europe and Canada, the US data suggests that Europeans - including our Thatcherite friends in Britain — kan't manage.
If you believe in dark matter, you believe:
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Posted in U.S. trade deficit and external debt | 22 Comments »
Posted on Tuesday, April 18th, 2006
By bsetser
China's leaders talk of rebalancing the basis for Chinese growth, shifting from exports and investment to consumption.
That makes a lot of sense to me. China's economy is every bit as unbalanced as the global economy. The conventional wisdom - see the Economist survey - is that China's domestic boom can continue despite China's own imbalances, just as an unbalanced global economy (watch for the March and April Trade deficit) can continue to grow in an unbalanced way.
But China already invests a lot and exports a ton. And that creates a risk that investment may tank or exports may tumble - ending China's ennui-inducing period of stable 10% plus growth.
China's leaders recognizes these risks in their rethoric - along with the need to address the growing rural/ urban divide. But the policy steps taken so far are far too timid to make a difference. The data is rolling in, and it isn't pretty. China is booming, no doubt — rather uncutting the argument that China is too fragile for any further revaluation. But its boom continues to be driven by investment and exports, and thus adds to its internal imbalances. For the gory details, see Wachovia's useful data wrap.
China's 2006 trade surplus looks set to be even bigger than its 2005 trade surplus, which wasn't small. I realize a lot of people - a truly surprising number of people - haven't adjusted their rethoric since 2002, and think China's trade surplus with the US is offset by deficits elsewhere. It isn't. We now know that China's q1 trade surplus was close to $25 billion. And the first quarter is China's bad quarter.
And that was in the midst of an absolutely enormous run-up in commodity prices. Basically, China is exporting more than enough assembly to pay a much higher bill for all its commodity imports - commodities used both in the export sector and domestically. Value-added is rising as well. That trade surplus didn't materialize out of thin air.
March export growth was above 28%, while import growth was 20%. Q1 export growth was 26.5, q1 import growth was 25%. Forecast that out for 2006, and China's trade surplus would be close to $140 billion for 2006.
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Posted in China | 52 Comments »
Posted on Monday, April 17th, 2006
By bsetser
The world bought $87b more of US long-term debt and equity than the US bought of foreign debt and equity. The net inflow exceeded expectations - there were some concerns that TIC inflow wouldn't be big enough to cover the February trade deficit.
I continue to object to the Wall Street shorthand that compares these inflows to the trade deficit. The US current account deficit will be about $10b a month bigger than the trade deficit in 2006.
Of course, the US can finance its deficit by doing things other than selling long-term debt. It can sell short-term debt (or take out a short-term loan from the international banking system). Or attract more FDI than US firms invest abroad.
But in recent years, the sale of long-term debt has been the dominant form of financing for the US - with net long-term flows in 2004 and 2005 exceeding the 2004 and 2005 current account deficit. So far in 2006, net flows are running about even with the current account deficit.
By my calculations, the US needs a bit over $80b a month just to cover the expected 2006 current account deficit, and over $80b a month if it wants to use long-term debt to finance foreign direct investment abroad. Without new FDI, it is hard to see how the US can create the dark matter that Hausmann and Sturzenegger think will keep large flow deficits from leading to any rise in the US net debt. If flows don't pick up, the US might even have to sell off some of its existing (dark matter generating) foreign assets.
To quote Lewis Alexander of Citigroup (via Mark Whitehouse in the Journal): "We need enormous amounts of capital inflows just to tread water."
And in February, that is more or less what happened.
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Posted in central bank reserves | 5 Comments »
Posted on Monday, April 17th, 2006
By bsetser
The actual source for this forecast is Moody's Economy.com. But the Journal now uses Moody's Economy.com regularly for their "Global economic snapshot" (page a8 of the print editition). The quality of the their forecasts - at least on topics I know well - hasn't been very good.
Afterall, the 2005 deficit was 6.4%, the q4 defict was 7% and all the data available so far suggests the deficit is growing.
Remember, the US imports oil. The US interest bill is rising. Last I checked, the US current account deficit sure looked set to rise.
Getting good current account forecasts is hard - most US forecasters have treated the current account as a residual - but I don't know of any credible forecast that is close to 6.2% for 2006. 7% is about right. I would say a bit more.
The Moody's Economy.com feed also has generated some really strange estimates for China's current account surplus in the past. Just saying.
The funky numbers marred what otherwise was a great day for international news coverage, with nice articles from Mark Whitehouse on Petrodollars, Yuka Hayashi and Justin Lahart on the global consequences of rising JGBs yields, and Henny Sender on China Construction Bank's desire to buy some of the United States' (financial) dark matter. CCB wants a stake in Bear Stearns. And China's state remains the majority owner of CCB.
Given the amount of debt China buys from US broker-dealers, it isn't surprising that China might want to (sort of) own one … and given how many Chinese goods Wal-mart distributes, I wouldn't be surprised if China someday decides it wants to buy some of Wal-mart's retailing dark matter too …
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Posted in General | 7 Comments »
Posted on Monday, April 17th, 2006
By bsetser
Last week, I heard a lecture by Hartmut Rosa, a social theorist who teaches, among other places, at the New School in New York.
He thinks the defining feature of modernity - particularly what he calls late modernity (i.e. now) is acceleration. Not only is the world changing, but the pace of change is speeding up. And the fast pace of change creates demand for innovations that help us manage a faster world, which in turn end up only speeding the world up more (Crackberries?). Or something like that.
The explosive growth of credit derivatives (see Table 1 of this chapter in the IMF's Global Financial Stability Report; hat tip, the New Economist) certainly fits with his thesis. I remember a time (and I am not that old) when credit derivatives were rather exotic. Now they seem to be the bread and butter of credit markets. At least in certain parts of the financial world.
CDOs (collateralized debt obligations, packages of bonds) turned into synthetic CDOS (CDOs composed of credit derivatives). Rather than trading credit risk folks started trading the correlation among the different companies (which became "names") in the CDO - since correlation is rather central to the performance of difference tranches of a CDO.
If trading correlation among tranches of a synthetic CDO sounds kind of greek, that's the point.
Though for all I know, trading correlation among the credit derivatives that makes up a synthetic CDO. may be a part of the past, not the future. Maybe a derivative has come along that eliminates the need to actually own (or short) various tranches of a synthetic CDO if you want to bet on the correlation among different names. Or maybe the really sophisticated folks have moved on to something new.
If you want an easy to read introduction to this topic, I recommend Mark Whitehouse's Wall Street Journal article.
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Posted in Systemic Risk | 16 Comments »
Posted on Saturday, April 15th, 2006
By bsetser
In a word, no.
Many in the economics blogosphere have mentioned Guy de Jonquieres recent FT column, Which argues that the US - not China - is the world's manufacturing powerhouse. And usually in a favorable light. Let me chime in with a dissenting voice.
De Jonquieres notes that China only manufactures ½ as much as the US. But China's economy is only around one sixth the size of the US economy. The world's largest economy should have the world's largest manufacturing sector if the term "advanced industrial economy" means anything at all.
I am all for pushing against over-generalizations that get repeated so often that they become conventional wisdom. The oft-stated argument that France isn't growing is one example. In fact, France has grown faster than either Germany or Italy over the past few years, and France grew for the same reason the US grew: soaring real estate prices have pumped up domestic demand.
But I would submit that the real story here is the growth in China's manucturing sector, not the fact that the US - the world's largest economy - continues to have the world's biggest manufacturing sector. Or the fact that the US manufacturing did a bit better than Japanese manufacturing from 1995 on. Japan, afterall, was in a prolonged slump; Japanese demand wasn't growing at all.
I don't have the data in front of me, but China's manufacturing sector was probably only ¼ the size of US manufacturing only a few years ago. Consider the trade data, which I do have in front of me. In 2001, China ‘s average monthly exports of manufactured goods were around $22b. Judging from the March data, China's 2006 manufacturing goods exports are going to average about $80b a month. That strikes me as a big change.
For the record, the US exports more manufactured goods than China. It just won't be for long if China's current export growth continues. By the end of this year, China will surpass the US.
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Posted in China | 35 Comments »
Posted on Thursday, April 13th, 2006
By bsetser
A condensed version of Dr. Roubini's latest post:
"I was wrong about the impact of $40 oil, but I'll be right about the impact of $70 oil."
I know Dr. Roubini was wrong about the impact of $40 oil because my name also appears on the 2004 note. We both were wrong. We thought high oil prices would be a drag on the economy in 2004. They often are.
Yet, global growth was very, very strong in 2004. Judging from the evidence, the magic formula for global growth is an undervalued Chinese RMB, high oil prices and a growing US current account deficit financed by the central banks of really poor countries and a few really rich oil sheiks. The formula is just so counter-intuitive that it took a long time to discover .. 2005 wasn't quite as good as 2004, but it wasn't bad by any means.
OK, maybe high oil prices aren't really tonic for the global economy. I think James Hamilton would say that a strong global growth has been a tonic for oil producers. Oil prices are high mostly because demand for oil is high. The key point, though, is that higher oil prices - and the resulting transfer of purchasing power from oil consumers to oil producers - hasn't been much of a brake on the world economy.
Nouriel identifies a couple of reasons why high oil prices might be a bigger drag going forward:
- The current run-up in oil prices seems to be driven at least in part by concerns about supply. Iran. Nigeria's delta. And, more generally, the folks that have oil are far more interested in renegotiating the terms of their existing contracts with big oil companies than in reaching agreement with the big oil companies on a new round of investment.
- The ever-resilient US consumer may not prove to be quite as resilient as before. Home prices may still be rising, but sales aren't. Since there hasn't been any shortage of investment in residential real estate in the US, that should eventually have an impact on prices. In 2003, 2004 and 2005, consumers tapped into their rising home equity (or just saved less as their homes appreciated) and kept on spending even as oil prices rose. Nouriel thinks that this process won't continue. The Fed will get in the way, pushing up short-term rates until long-term rates have to go higher. Or US consumers will simply burn out, and lose their desire to take on more debt.
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Posted in oil | 40 Comments »
Posted on Thursday, April 13th, 2006
By bsetser
At the end of my post yesterday, I noted that the year over year growth rate in non-oil exports - 9.3% — might be a bit misleading. In 2006, the Chinese new year slowed US imports in February; in 2005, the impact came in March. So the January + February comparison compares a strong month (January) and a weak month (February) against two strong months in 2005. If March non-oil imports jump back to their January level, the year over year growth rate would be more like 11.8%. That comparison makes more sense to me as well, since it picks up two strong and one weak month in both years.
And to be honest, given how strong Chinese exports were in March, I wouldn't be surprised to see March non-oil imports top January non-oil imports.
The current 11.7% growth in exports - a very strong growth rate, one that reflects a strong world economy that wants to buy a lot of Boeings - would imply exports would increase by a bit under $150b.
$70 a barrel oil for the rest of the year would - in my calculations - push the US oil import bill up by about $50b.
Combine 11.8% growth in non-oil exports and 11.1% growth in service exports (the 2005 y/y growth rate) and the US non-oil import bill would rise by around $200b.
Sum that up, and the trade balance would deteriorate by about $100 billion, to around $820 billion. Supporting graphics have been outsourced to Menzie Chinn.
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Posted in U.S. trade deficit and external debt | 11 Comments »
Posted on Wednesday, April 12th, 2006
By bsetser
China's March trade surplus topped $11b - and its goods exports were a very impressive $78 billion. China February surplus was about $2.5 billion, and its exports only 54.1 billion. China had an impressive surplus in January, when its exports were $65 billion …
I mention these numbers because I suspect the big fall in Chinese exports in February holds clues to interpreting the US February trade data.
February is a short month, and the US tends to import more in the fall than in the winter. The holiday shopping season. That is why seasonal adjustment matters.
But the US data - even with seasonal adjustment - sometimes shows a bit of month to month volatility. Particularly in the first quarter. Often because of the Chinese new year.
Last year, non-oil imports fell by about $6 billion in March (compared to February). Chalk it up largely to the impact of the Chinese new year - though there was also a slowdown in non-oil import growth/ an inventory correction going last winter and spring.
This year, the Chinese new year showed up in the February data. Non-oil imports fell by about $4.6 billion, driving a $4.2 billion fall in overall imports. That fall explains the fall in the United States overall deficit, which shrank from a very large $68.6b to an almost as large $65.7b.
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Posted in U.S. trade deficit and external debt | 14 Comments »
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