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A soft landing means sustained $1 trillion plus (7% of GDP) current account deficits …

by Brad Setser
June 27, 2006

Over the past few years, US imports have grown faster than US exports.  The result — to no one surprise: an expanding trade deficit.    Because of the gap between imports and exports, US exports need to grow around 60% faster than US imports to keep the deficit from growing.  Even if you exclude oil, that hasn’t happened on a sustained basis.   

The trade deficit grew even as the dollar slumped v. the euro.  That doesn’t mean that changes in exchange rates don’t matter, as some argue.  Recent US export growth has been over 10% — well above its long-term average.  The dollar’s slide (and Boeing’s recovery) is central to that.    But import growth was still stronger than export growth. US demand growth has propelled global demand growth, and foreign producers have captured a large share of the increase in US demand. 

What hasn't happened?  At least not yet?  Interest payments on the United States growing stock of external debt haven't contributed to the growth in the current account deficit.  Yhe US income balance probably is mismeasured – something Daniel Gros has emphasized.  The reported return on foreign direct investment in the US is a bit to low to be believable.  But even with adjustment to correct for the differences in how reinvested earnings on FDI appear in the data, the US income deficit hasn’t grown even as US external debt has increased.  
 

Why?  Largely because the average interest rate on US external debt has fallen.  The interest rate on interest bearing debts fell above 6% in 2000 to around 3% in 2003 and 04.   That drove the average rate the US pays on all its liabilities – including foreign direct investment – down as well.  That started to change in 2005 – and, in my view, a growing deficit on income payments (think interest on the US debt) will start to drive the expansion of the US current account deficit.   

That is one place where I disagree with Richard Berner.  I don't think the improvement in the income balance in the first quarter of 2006 is sustainable.   And I looked at it in some detail.  The increase in China's May trade surplus and Japan's May current account surplus may also tell us something about the course of the US trade deficit.  Finally, I worry that the fuel that the dollar's past decline has provided for export growth is beginning to run out — and that without further declines in the dollar, current, strong US export growth won't be sustained.   Should US demand growth slow, the world may slow too … slowing US export growth absent further dollar declines.

More generally, the dynamics of adjustment are likely to be daunting — something I explore in some length below (with a couple of graphs)

The following graph shows what happens if the pace of import and export growth moderate a bit – and both retreat to their long-term averages.   As a result, the expansion of the US trade deficit slows.    But the expansion of the US current account deficit doesn’t slow.    Existing debts get repriced at higher interest rates as they come due.  And borrowing $1 trillion a year at 5% plus starts to add up.

soft_landind_1
It is often noted that the US is in a better position than most big debtors because it borrows in its own currency.  That’s true.  I would be really freaking if the US was borrowing in RMB.    It also means that the US gets a boost from dollar depreciation, which increases the dollar value of (some) US external assets.    That boost is particularly strong if the dollar depreciates v. European currencies – since most US investment is in Europe. 

But the US has a different external vulnerability.  With gross debts of nearly $8.6 trillion at the end of 2005 – nearly 70% of US GDP (the end 2005 estimate is mine; the formal data will be out soon)  and an estimated 2005 net international investment position of around $3.2 trillion (25% of GDP), the US is increasingly vulnerable to an interest rate shock.   Most US lending to the world is in dollars and is tied to US rates – generating offsetting income should US rates rise.  But the US would still be hurt on its net debt, and borrowing abroad to invest in equities and the like would be less profitable.   With a net (interest bearing) debt position of $4 trillion (gross debts of $8.6 trillion v $4.6 trillion in external lending), a big rise in rates would really hurt.   And even a little rise can have an impact.  The 2005 interest rate was around 3.6%.  It will go to 5% or more.  That would push interest payments on existing US debts up by $65b – and the US is adding about a trillion in new debt a year.

The sharp rise in net interest payments from 2005 to 2009 consequently is payback in some sense for the absence of an income deficit from 2000 to 2004.  The average interest rate on all US external liabilities — counting the low returns on portfolio investment and foreign FDI in the US –  fell from 3.7% in 2000 to 2.5% in 2003.  In this projection, it rises from an estimated 3.4% in 2005 to 4.8% in 2006, 5.25% in 2007 and then stays at 5.5% after 2008.   

Why will the rate rise to 5.5% — well above the 3.4% rate in 2000?   Two reasons, other than 5.5% is nice round number.   First, the implied return on US FDI in 2000 was very low – only 2%.  It will be above 4% in 2005.   Despite all my complains about discrepancies in the way reinvested earnings are counted in the US data, the BEA has gotten a bit better at collecting this data.   Without a recession, the implied return on foreign investment in the US is going to presumably remain at 4% or more.   That pushes the rate up.  The dividend yield on US portfolio equities held abroad has also increased – though it remains pretty low and pulls the average down.   Second, the composition of US debt held abroad is changing. In 2000, it was about ½ short-term bank lending and ½ long-term US debt securities.  Now longer-term US debt securities are about twice as big as the short-term stuff.   Foreign holdings of corporate bonds – to the extent that they don’t disappear from the survey data – will tend to push up the average rate.   John Kitchen –whose forecasts have a lower average interest rate going forward – doesn’t account for the changing composition of US external liabilities.  I don’t think 5.5% in 2008 is unreasonable …

Footnote: I also assumed a slightly higher rate of return, around 6.5% once US rates normalize, on US assets than on US liabilities in these forecasts – enough to generate a $100b bonus for the US.   Call it $2 trillion in dark matter.   Personally, I think that is too much, since it basically counts the difference in reinvested earnings as dark matter.  But rather than fight the dark matter fight, I just made a simple, standard assumption.   The US has gotten a roughly $100b bonus from FDI for the past few years.  I project it will continue to get that bonus – but don’t assume that the US will get any more.

Remember, this expansion of the US current account deficit is what happens if the pace of US import growth slows.   This projection is consistent with a weaker dollar.  Or with slightly slower US and global growth.  It most certainly doesn’t represent a continuation of the current import boom.    And even in that case, the US current account deficit is headed toward 9% US GDP in 2008.

Compare that graph with the following graph, which shows what happens if US exports start to grow significantly faster than US imports.   Roughly twice as fast.   I assumed that change starts in 2007.  Given the momentum in year over year data (growth in the tail end of 2005 is currently pushing up 2006 imports, for example) it is hard to see how the basic pattern could shift much faster.

soft_landind_2
Such a change would represent a significant shift in the world economy.   Rather than growing, the US trade deficit would start to fall.    US import growth is around 5-6% in the projection – basically in line with US GDP growth.   It is an environment where those countries now relying on exports to propel their growth have a hard time.  That’s you, China.   And a few others.

But the fall in the US trade deficit back to its 2000 levels doesn’t bring about any fall in the US current account deficit.   At least not if the average interest rate on US external liabilities rises toward the shockingly high (note the irony) nominal rate of 5.5%.     Rather, the interest payments that come from the repricing of the United States $8 trillion plus on its existing debts and paying a bit over 5% on roughly a $1 trillion in annual borrowing the US needs keep the US current account deficit above 7% of GDP through 2010.

That, folks, is my definition of soft landing.  US growth presumably slows.  Something has to change to bring US import growth down.   The dollar weakens.  Remember, the projection assumes US export growth is nearly twice as high as it was from say 1995 to 2005.  Rather than growing in line with US GDP, exports rise as a share of GDP – while imports stay constant as a share of GDP.  Global growth presumably is a bit weaker without as much impulse from the US.  And so on.

To sustain that soft landing equilibrium, a few things have to happen.

  • First, those foreign investors who now hold the $13.9 trillion in claims on the US have to be willing to hold onto those claims.   That includes central banks and oil investment funds that now presumably hold well over $3 trillion in claims on the US – personally, I think the actual number might be closer to $3.5 trillion, counting all the Gulf investment funds.  
  • Second, American investors have to be willing to continue to keep the vast majority of their wealth in the US, and in dollars.  That cannot increase their $10.7 trillion or so of (estimated) external assets.  If Americans want to add to its investments abroad, the financing the US needs from the rest of the world goes up.
  • Third, a combination of foreign central banks and private investors abroad has to be willing to add  $1 trillion a year, give or take, to their holdings of US assets.   And they need to be willing to do so for nominal rates of around 5%, no matter what happens to the dollar.

This is all just basic math.  If you are running deficits, you need to borrow – so someone has to lend to you.  And the US will be running big deficits for a long time even if it starts to adjust.

The US isn’t the banker to the world, despite what some still say.  It is a borrower from the world.

Getting rid of these borrowing requirements faster implies a hard landing.

This analysis has one interesting implications.  At some point in the future, the world’s central banks will no longer be financing export growth when they add to their reserves.   Remember, in an adjustment scenario, US import growth slows – and US export growth rises.  US imports rise in line with US GDP.  Nothing exciting.

Rather, central banks will increasingly be financing interest payments back to themselves.  

In some sense, central banks may have no choice but to do this – in the same way that Citibank (and others) found itself forced to lend new money in the 1980s to help big Latin debtors pay interest on the principal they already owed Citi.  But it does imply a bit of change.    The countries governments – and their electorates/ populations/ businessmen – may not enjoy financing (minimal) payments on their existing debts as much as they enjoyed financing a surge in US imports.  Far more constituencies benefit from a surge in their exports to the US than from a surge in interest payments to the central banks of the emerging world.

I’ll have more to say on how this forthcoming change will change the political economy of the Bretton Woods 2 system of central bank financing of the US on another day – I already have gone on for too long.

39 Comments

  • Posted by Guest

    So the smart thing for individual investors to do is to buy foreign assets in currencies that will appreciate vs. the dollar. In short, don’t be a “good citizen” and keep your money at home. Warren Buffett seems to agree from what I read: plans to sell US real estate assets to buy more foreign assets.

  • Posted by RN

    What a fantastic post. Clear and extremely well-reasoned and defended.

    Tremendous work, and I thank you very much for it. I’m sure we all do.

  • Posted by RS-K

    Brad,

    Nice post. There are three (mutually-exclusive) possibilities:

    a. dollar “hard landing”–Krugman’s fire sale paper (AER 1986) lays out the risks associated with this scenario; Nouriel has identified the potential costs.

    b. smooth adjustment–assume that the hard landing doesn’t materalize; rather we enjoy a fairly benign adjustment (dollar depreciation, consumption slowing, etc.) in which U.S. growth slows, but doesn’t stall out. In this case, we can expecte to see large trade imbalances continue with attendant protectionist perssures. The latter could escalate with tit for tat measures, with loss of the gains from trade. This, in turn, wouldn’t be good for asset values–think of all the investment that has been made on the assumption that globalization will not falter; and the assets taht would have to be repriced.

    c. No adjustment–finally, assume that the status quo with large external imbalances is sustainable indefinitely. Even this “no-pain” outcome could bring bad news for the global economy. As Barry Eichengreen has pointed out, current imbalances could lead to the stabilization of -NFA position at a fairly high level (on the order of 100% of GDP) under not-too-unrealistic assumptions. Assuming an capital-output ratio of 3:1, this implies that one-third of the U.S. captial stock is transfered to foreign hands. This is possible, but is it likely? Would Congress act? And, if it does act, would this not trigger a more abrupt adjustment process?

    So pick your scenario and fasten your seat belt. It is going to be an interesting ride.

  • Posted by Guest
  • Posted by Guest
  • Posted by Guest

    China’s cabinet is planning a closed-door, two-day meeting this year to set a fresh agenda for overhauling the financial system, including changes for China’s most troubled banks.

    GM plans to offer 0% financing on many of its vehicles to clear inventory ahead of its new model year, heating up the incentive war between domestic auto makers.

  • Posted by Charles

    This is a terrific post, Brad.

    I think you’ve done your best to present a best-possible-case-with-free-cotton-candy. The real case will of course be worse. A good guess is that there hasn’t been a significant adjustment already for political reasons. The longer it is put off, the sharper it will be. For that reason, it is likely that interest rates will spike far higher, initiating a recession and– because of the exacerbation of government finances– will have the reverse of a countercyclical response.

    The chances of this turning into not a hard landing but a soft splat are significant.

  • Posted by bsetser

    first, thanks for the feedback; it is appreciated.
    second, i thought the gavekal analysis in the mauldin link was interesting — fodder for the future.
    third, one small point on the eichengreen scenario (stabilization with ext. debt to GDP of around 100% and current account deficits of around 5-6%) laid out by RSK. Tis true that the debt would stabilize at that level with current account deficits of that size — Eichengreen knows his stuff. But composition of the current account deficit would be very different — it would be all interest payments. Even in that scenario, the trade deficit needs to fall. trade and transfers deficits of 6% of GDP are not consistent with stabilizing the US external debt for any combination where the real interest rate on US external debt (in $) exceeds the real growth rate.

  • Posted by Guest

    Very interesting. Are you reffering to a specific paper from Eichengreen?

  • Posted by Gcs

    superb post brad
    “central banks will increasingly be financing interest payments back to themselves ”

    which is a barren exercise
    indeed
    now their financing exports

    then they’ll be
    financing paper for paper with paper

  • Posted by bsetser

    I think it is in eichengreen latest paper (january or february) on different views of the current account deficit. he also has an interesting oped on why us is not like austrialia — namely, a commodity boom won’t juice up exports just when housing stops spurring consumption.

  • Posted by Gcs

    “Even in that scenario, the trade deficit needs to fall. trade and transfers deficits of 6% of GDP are not consistent with stabilizing the US external debt for any combination where the real interest rate on US external debt (in $) exceeds the real growth rate”

    do you mean the two stabilize
    ie the ratio of the gdp to net foreign debt
    when the two are growing at the same rate ???

    ie

    the rate of gdp growth is x% relative to itself

    and the net foreign debt is growing by the same x%
    relative to itself
    or relative to gdp ???
    if the former then

    the ratio of the two rates will equal
    the stability ratio of gdp and net foreign debt
    example
    cad of 9 % and gdp of 6%

    leads to a debt to gdp stable ratio of 150%

  • Posted by DOR

    Excellent post!

    Soft landing: 7% current-account deficit-to-GDP.

    What does that imply for the fiscal side?

    .

  • Posted by touche

    The scenario in the first graph is the more realistic of the two though it shows us falling into a black hole. The challenge for investors is to find a safe niche that will survive the cataclysm. Let the fun begin.

  • Posted by bsetser

    DOR — the soft landing projection is consistent with any combination of us domestic demand growth and real value of the dollar that leads nominal import growth to slow to nominal gdp growth. my personal view would be that such a path likely implies some fiscal adjustment, which would help to slow domestic demand growth.

  • Posted by HK

    Brad–An excellent analysis; importance of the income account deficit for the US current account deficit in coming years is well documented.

    In a completely diabolical context, Japan’s current account surplus is now dominated by the income accounr surplus. So, it is very difficult to reduce its current account surplus if the trade surplus is reduced and turned into deficit, since the income account surplus is snowballing. (Please note that the trade balance is related to real economic activities, and a reduction of the trade surplus means negative contribution to growth.)

    Japan’s Balance of Payments in 2005
    Currennt Account $160 billion 3.6% of GDP
    Income Account $100 billion 2.3% of GDP
    Trade Balance $70 billion 1.5% of GDP
    (The remaining gap is small deficit in the current transfer payments.)

  • Posted by MrBill

    Thanks for the interesting post Brad. A note on this comment.
    “c. No adjustment–finally, assume that the status quo with large external imbalances is sustainable indefinitely. Even this “no-pain” outcome could bring bad news for the global economy. As Barry Eichengreen has pointed out, current imbalances could lead to the stabilization of -NFA position at a fairly high level (on the order of 100% of GDP) under not-too-unrealistic assumptions. Assuming an capital-output ratio of 3:1, this implies that one-third of the U.S. captial stock is transfered to foreign hands. This is possible, but is it likely? Would Congress act? And, if it does act, would this not trigger a more abrupt adjustment process?

    Written by RS-K on 2006-06-27 15:31:35″

    I have to agree that significant fall in the external value of the dollar would simply make real assets in the USA that much more attractive to foreign investors seeking a foothold in what is the world’s largest internal market.

    However, can someone tell me about global banks and companies who are nominally US incorporated, but earn a significant percentage of their revenue abroad in euros, yen, yuan and a basket of other foreign currencies. As the dollar depreciates, they have a translation gain on their balance sheets from their overseas operations. Although they would technically be taxed if they repatriated those earnings, surely they could also use an offshore SPV or other means to buy US assets on the cheap should the dollar fall far enough to make them attractive targets?

    Just curious about other ways that the current account deficit can be plugged?

  • Posted by DF

    Brad you need also to build a model where foreign CBs drop the dollar, and the FED starts to monetize the federal deficit : the interest rate moves back to 2% or even 0% because of the credit crunch.
    As soon as the demand for credit slows, the interest rate may well fall.

  • Posted by RN

    DF -

    “As soon as the demand for credit slows…”

    That’s not possible anytime soon. There’s too much debt extant. The opposite is the big worry.

  • Posted by OldVet

    MrBill “fall in the external value of the dollar would simply make real assets in the USA that much more attractive to foreign investors”

    Maybe. If a foreign investor with books in Euros were looking at the situation, they could acquire assets cheaply in an integrated market whose buying power was unfortunately falling – due to the same FX move that made the assets attractive. So it would then depend on exactly what type of assets were to be bought, and if they had “export” potential – even real estate resorts have effective “export” potential. US investors (dollar-centric balance sheets) might use a SPF to make some reverse-investments, but only if it wouldn’t harm the global value of the firm’s balance sheet, or income statement. The considerations would be the same, really. Firms look at global asset values and global maximization of income streams most of the time, rather than currency specific values. That’s changed a lot in the last 15 years, even for smaller firms.

  • Posted by Guest

    A well-timed warning: The central bankers’ bank does not talk lightly about inflationary pressures. So when the Bank for International Settlements publicly cautions that central banks may need to raise interest rates more quickly, to head off inflation, it must be taken seriously.

    Global Property Cycle Turns Down: Global financial markets have not woken up to the fragility of global demand that supports corporate earnings and demand for commodities. As global property turns down, commodity demand and corporate earnings are likely to surprise on the downside in 2007.

  • Posted by Guest

    Might America’s books be as opaque as Goldman Sachs’ and if so, may we assume there could be (many) distortions and hidden risks we can’t anticipate?

    Perhaps one more visible risk being that many of the fastest growing industries, which seem to focus more on the reallocation of wealth than its creation, don’t appear to be sustainable (please correct me if I’m wrong). Tourism, gaming, marketing, philanthropy and flourishing branches of finance, perhaps even politics and lobbying, along with various types of security and insurance industries that provide alleged protection from current and unknown threats and a thriving criminal sector, all seem to feed heavily off underlying industries that support the entire system. Rather than blame consumers and workers for the bulk of America’s financial problems, I can’t help but wonder if some of these industries may be contributing substantially to imbalances and misallocations.

    So back to ‘OldVet’s’ comment: “it would then depend on exactly what type of assets were to be bought” along with yesterday’s remarks about infrastructure investment and different definitions of a ‘healthy economy’. Yes – I agree that infrastructure investment is good – but also very expensive to maintain. So my tinfoil hat dark ages scenario imagines a Katrina like situation in which established infrastructure fails in an infrastructure dependent population, the lights go out, electronic ATMs can’t be accessed (even scarier if this were to occur as banks were collapsing), refrigeration systems fail, the gas and water pumps don’t work, transportation systems are jammed by those with the cash and fuel to leave, and we find out just how many people own guns and how they might use them in this sort of situation.

    Katrina showed us that it can happen in contemporary North America. So back to the comment on Nouriel’s blog about magnitude. When we refer to ‘hard landing’ – is there any feasible way of translating that scenario into regions, populations, magnitude, duration and consequence – and possible impacts on asset valuations. In any hard landing scenario, my guess is that some assets may be rendered worthless or next to it, while others appreciate substantially – as did commodities and real estate while ‘new economy’ asset valuations collapsed.

    Perhaps it’s only my problem, but I’m still far from clear as to how a soft landing may play out in real terms. i.e. more broadly distributed – or more someone gains from someone else’s pain and it all averages out over time (duration?) and across regions?

  • Posted by gillies

    economics has always suffered from poverty in the department of imaginative imagery and metaphor. i dislike the hard/soft landing metaphor as economies do not land. a better image would be a ‘stall’ – where the economy, hopefully, resumes its forward progress on a lower level after losing height. the ‘stall’ image is not perfect, but has a lot of useful parallels.

  • Posted by Enrique

    About:
    “Global financial markets have not woken up to the fragility of global demand that supports corporate earnings and demand for commodities. As global property turns down, commodity demand and corporate earnings are likely to surprise on the downside in 2007″
    Written by Guest on 2006-06-28 12:38:42

    I have read many times in the last days that a US slowdown will cause a fall in commodity demand, and it’s not obvious to me. In the past, commodity demand was fueled mainly by US-Europe-Japan. But these economies now rely heavily on the non-tradable sector.
    Tradable goods are today a lot cheaper ’cause of China & others.
    It’s possible to imagine a slowdown in US-EU-Japan with small impact on commodity demand.Commodity demand grew mainly in China, India and some oil-exporting countries. In China tradable goods are a much bigger part of GDP. In an US-demand-slowdown-scenario maybe China will expand internal demand, perhaps mainly of transable goods (in many China is already the biggest market)and will keep demanding commodities. Oil-exporters with growing demand from their population, may curb buying luxury items but hardly cheap clothes & electronics. I’m not so sure about India, but overall I doubt that an US-slowdown will automatically imply lower commodity prices, as in the past. ┬┐What do you think?

  • Posted by bsetser

    Enrique — My view is that a US slowdown would lead to a signficant slowdown in China (no more 30% y/y export growth) and might trigger an investment slowdown in China — so I am not convinced Chinese demand for commodities will prove to be independent of US demand growth. Hope I am wrong and should the US slow, China will decouple.

  • Posted by Enrique

    Brad:
    I trust you to know China’s economy much better than I. Still, the point isn’t if there will be a stall in export-led growth(given), but the possibility of internal demand filling the void.
    I’m not 100% sure that will happen, but I wonder why most seem sure of the opposite. Should’t they at least talk about probabilities??
    Thanks

  • Posted by bsetser

    enrique — yes, that would be the ideal scenario. but i think most people would tend to bet that one component of internal demand — investment — won’t sustain its current pace of growth. And if investment falls from 20% plus to 10%, that is a big hit. other components of domestic demand would really need to take off.

    the other risk is that historically — per lardy — consumption growth has been correlated with investment, so when investment slows, everything might slow. that isn’t what any one wants. but it still may happen.

    i think the concern come from the very strength of china’s current investment growth. it seems so strong that some slowdown seems inevitable.

  • Posted by Movie Guy

    Noteworthy post, Brad.

    You made a number of good points.

    I realize that you are focusing primary attention on the current account deficits in your discussion, but I would like to explore your rationale for assumptions regarding U.S. trade imports and exports.

    Posts follow.

  • Posted by Movie Guy

    Missing graph discussion:

    It would have been worthwhile to have posted a projected growth graph based on continuation of the ongoing trade growth (however improbable), particularly since it’s likely that U.S. exports growth will not maintain pace with U.S. imports growth in the next few years absent a U.S. dollar devaluation.

    I am suggesting that U.S. imports should continue to grow under such a ‘missing graph’ scenario. U.S. imports growth is highly probable if not guaranteed as the U.S. transfers more high technology knowledge and production to overseas production sources. Similarly, U.S. exports will increase in the short run as the U.S. loosens up its export technology controls, but its unlikely that such export growth will be sustained once foreign reverse engineering, U.S. corporate technology give-away, and market access “exchange” programs are in place.

    The net result of the high technology transfer will be an increase in U.S. imports of goods, if not services also.

    >

  • Posted by Movie Guy

    First graph discussion:

    Brad – “The following graph shows what happens if the pace of import and export growth moderate a bit – and both retreat to their long-term averages. As a result, the expansion of the US trade deficit slows. But the expansion of the US current account deficit doesn’t slow. Existing debts get repriced at higher interest rates as they come due. And borrowing $1 trillion a year at 5% plus starts to add up.”

    Brad – This [first graph] projection is consistent with a weaker dollar. Or with slightly slower US and global growth. It most certainly doesn’t represent a continuation of the current import boom.

    What specific “long-term averages” for U.S. imports and exports are you employing in creation of this graph?

    How does a weaker U.S. Dollar affect existing trade with China considering its currency basket operation?

    >

  • Posted by Movie Guy

    Second graph discussion:

    Brad – “Compare that graph with the following graph, which shows what happens if US exports start to grow significantly faster than US imports. Roughly twice as fast. I assumed that change starts in 2007. Given the momentum in year over year data (growth in the tail end of 2005 is currently pushing up 2006 imports, for example) it is hard to see how the basic pattern could shift much faster.”

    It’s not hard to visual significant gains in imports of high technology goods from China and other global sources between 2007 and 2011. That is part of the U.S. imports growth curve apparently missing from your analysis. I have discussed this matter in a number of posts with supporting links during the past two weeks. You may not believe it, but it will happen.

    You stated, “US import growth is around 5-6% in the projection”, therefore you are suggesting U.S. exports growing at 10-12%. You also stated, “It is an environment where those countries now relying on exports to propel their growth have a hard time. That’s you, China. And a few others.” Later, you said, “Global growth presumably is a bit weaker without as much impulse from the US.”

    Under what conditions do you expect U.S. exports to grow at twice the rate of U.S. imports?

    I assume that you are again employing a scenario based on a weaker U.S. Dollar? If not true, how do you account for U.S. export growth of 10-12% while assuming that U.S. import growth will be 5-6%?

    If the global economy is presumably a bit weaker (your potential scenario condition), why would we observe continued growth or a surge in U.S. exports? How is that possible? A weaker U.S. Dollar alone will not accomplish this goal if the global economy is weakening based on the range of available U.S. exports unless the Dollar devaluation is quite large.

    I also suggest that the following considerations should be on the table unless proven to be incorrect.

    Between 2006 and 2011, absent a major national or global recession, U.S. imports will not necessarily decrease in Dollar terms if the U.S. Dollar is devalued. Even with a recession, the ratio of imports to exports and GDP level may remain fairly consistent.

    1. Consumer and business product imports will not decline significantly in Dollar terms absent a major recession. Declining valuations in the U.S. Dollar would affect the import volume of such goods perhaps, but not significantly decrease the Dollar value of such imports. The majority of U.S. consumer and business goods are now manufactured abroad. People will still buy such consumer goods, regardless of volume levels of purchases. Moreover, China and other countries have the ability to provide financial incentives to keep their export markets operating within a given range of performance; exporters and supporting national governments will not sit by and watch their export production dry up.

    2. Crude oil, Ethanol, and natural gas imports will probably increase, not decline between 2006 and 2011.

    4. Raw materials imports will decline or increase based on economic growth factors, where for domestic consumption or input for export goods. If raw material imports decline, it should be a safe bet that the U.S. exports market and U.S. economy are declining. It’s a double edged sword.

    5. Food product imports most assuredly could decrease due to a U.S. Dollar devaluation.

    >

  • Posted by Movie Guy

    Blaming U.S. consumers and businesses for U.S. imports imbalances is pure nonsense

    The notion that U.S. consumers (and businesses) need to reduce consumption remains one of the weaker and most ill-conceived arguments stated by various analysts. The majority of U.S. consumer and business administrative support goods are now manufactured abroad, and that is the central issue. Any potential or known overconsumption issues are secondary considerations. Analysts are not addressing the first problem – source location of goods production.

    Few would be complaining if the majority of consumer goods and business administration support goods were manufactured in the USA or exported from the USA to the world.

    Can you replace your computers, printers, cameras, televisions, cell phones, newer textile goods including clothing, children’s toys, and a range of other consumer goods with U.S. domestic-source end item manufactured products of equal or better quality at comparable prices? I suggest not.

    So, what are we really complaining about? Source of goods production and its impact on the U.S. trade and current account deficits.

    >

  • Posted by Anonymous

    there are of course other good reasons to expect a hard rather than a soft landing. total US credit market debt has grown much faster than GDP in recent years – in fact, about 6 times faster. from 2000-2005 it took approx. $12 trillion in additional debt to produce $2 trillion in output growth. it is reasonable to suspect that this huge explosion in credit has gravely damaged the economy’s structure by encouraging malinvestment. in all likelihood the necessary liquidation of this malinvested capital will be a harsh affair, accompanied by a credit contraction similar to post-bubble Japan’s. with 63% of all US bank assets in mortgage loans there is considerable danger that financial intermediation could be severely impaired by a retreat in house prices and rising defaults on account of ARM resets.

  • Posted by DF

    I wrote
    “As soon as the demand for credit slows…”
    RN commented
    “That’s not possible anytime soon. There’s too much debt extant.”

    RN I don’t get your point. As you acknowlede there’s a lot of debt around and as you know asset prices are falling in all directions. Therefore consumers will face negative wealth and stop to borrow and or declare bankrupcy, phrased otherwise, demand for credit will crash. Credit crunch.

  • Posted by Guest

    Setser, there are some good questions on this post.

    Why not answer them?

  • Posted by Guest

    ppl r so demanding, u get what u pay for folks…

  • Posted by Stormy

    All those “if’”: pie-in-the-sky. Not going to happen. Fasten your seatbelts.

  • Posted by Guest

    Won’t or can’t answer questions?

    How does the post then have any credibility?

  • Posted by Guest

    China: A Revolt Against Foreign Takeovers – Chinese bloggers and businessmen are putting pressure on Beijing to crack down.