Brad Setser

Brad Setser: Follow the Money

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George Magnus makes an important point. If the oil surplus is rising and Asia’s surplus isn’t falling …

by Brad Setser
August 23, 2006

If the oil exporters current account surplus is rising, and oil-importing Asia’s surplus isn’t falling (thanks to China and Japan), then either the US or the European deficit has to be growing.   Global balance and all. 

Up through 2005, though, almost all the deterioration has come from the US.  Magnus:

However, the distribution of the oil shock has been more uneven. The US has borne the brunt of the decay in external balances. Europe’s position has remained stable while Asia’s has actually strengthened. Thus, global imbalances are being exacerbated by petrodollar developments to the disadvantage of the US. 

Fortunately, the oil exporters seem quite willing to hold their surplus in (offshore) dollars, and thus finance the US.    Russia is a bit of an exception, keeping only 50% of its reserves in dollars.  But 50% of a big number is still a big number. Russia's reserves, incidentally, are up about $11b in the first eleven days of August.  Some of that is valuation and capital inflows, but most of it comes from oil and gas exports.  A chart tells the same story.george_magnus_us_defecit_ba

My “oil exporting regions” are Africa, the Middle East and Russia.  That leaves out Venezuela and Norway, so it understates the global oil surplus.   

But the basic idea is still pretty clear.  The oil surplus is rising.  Asia's surplus is not fallin, and perhaps even rising.  And until recently, most of the offsetting increase in the world's current account deficit came from the US.

There are some signs that this pattern may be changing.   Import growth in Europe this year has been very, very strong –  strong enough to offset very strong European export growth.  Eurozone goods imports are up 18% y/y.   EU-25 goods imports are up 20% y/y (January-June 06 v. 05).  US goods imports are only up 13.3% or so.   And EU/ eurozone imports from China are actually growing faster than US imports from China.   Go figure.

16 Comments

  • Posted by Guest

    Euro-Zone Trade Balance Shifts to Surplus: The euro zone’s trade balance with the rest of the world moved back into surplus in June, according to figures released by the EU.

  • Posted by Guest

    “[C]onsiderable mystery surrounds the investment of petrodollars. The Bank for International Settlements says it cannot trace 70 per cent of the accumulated investable funds by oil producers since 1999. Reasons include the desire of those producers to remain off statistical reporting radar screens, the growth of agencies to manage petrodollars, the outsourcing of funds to offshore institutions including hedge funds and private equity, the repayment of debt and the growth in real estate and foreign direct investment.

    “The tripling of US resident banks’ liabilities to foreigners to just over $3,000bn between 2003 and 2005 – with the UK and Caribbean centres accounting for 65 per cent of the rise – is indicative of the weight of petrodollars, its penchant for obscurity and the probability that it remains mainly in US dollars. Geopolitical tensions have the potential to be disruptive to the financial interdependencies between oil exporters and the US…

    “Transparency over petrodollars would be worthwhile but is not critical. An accentuated downturn because of differing spending propensities would be unwelcome but of limited duration. But there is a tension in the triangle that links petrodollars to population and politics. If these funds are allocated to economic development in the face of rapid population growth, they will be a positive force in the global economy. If not, they may end up in non-economically productive uses, as a catalyst for instability and ultimately in a disruptive move away from the US dollar.”

  • Posted by bsetser

    I have been looking at the rolling 12 month total for the Eurozone deficit — it started to decline in early 05, and that decline certainly continued in q1. Maybe that deficit is now stabilizing (oil exporters buying more european goods/ european vacations?) ….

    data is here, with a nice graph:

    http://www.ecb.eu/press/pr/stats/bop/2006/html/bp060822.en.html

    the eurozone’s negative income balance is a bit strange tho. I need to look more closely at its NIIP. I would think European FDI would be profitable. but then again, all the (very, very, very profitable for tax reasons) US investment in ireland may generate an apparent income deficit. it is worth looking at, I suspect — tho I don’t know where to start.

  • Posted by Guest

    ASEAN Agrees to Speed Market Plans: Southeast Asian trade ministers agreed to an accelerated timetable to turn their region into an EU-style economic community by 2015.

    Asean Sees Investment Rising: Foreign direct investment in Asean’s 10 states rose 48% last year, but officials said the bloc must redouble efforts to match investment in China.

    The Manchurian Mandate: China is gearing up to turn its northeastern rust belt, once the centerpiece of Chairman Mao’s planned economy, into the country’s next engine of growth. [also see Tianjin, cf. Binhai New Area & India: The SEZs Rush]

  • Posted by Dave Chiang

    Weakness in US Economy could crash Chinese Economy with global production overcapacity
    http://business.guardian.co.uk/story/0,,1855956,00.html

    The trigger for a crash could be a period of weakness in the US, the main customer for low-priced goods from Chinese factories. Exports and fixed investment account for more than 80% of China’s GDP, and any sudden fall in US demand would feed through into factory closures and higher unemployment in China. The initial shock would, it is feared, be compounded by a financial crisis as it brought to light numbers of under-performing bank loans.

    In the short term, the government would throw money at the problem by expanding public spending. In the longer term, the solution would be to expand consumption – the mainstay of developed economies but a poor third behind investment and exports in China.

    According to the commerce ministry, domestic supply exceeds demand for about 70% of consumer goods. The gap is evident at many of the new shopping centres. In Beijing’s Golden Resources Mall, whose owners claimed it was the biggest in the world when it was opened in 2004, sales staff far outnumber the customers. Half of the restaurants have closed, so has the spa and beauty salon. Several chain stores have moved out.

    “Business isn’t what we expected,” said a sales clerk at the Lancel outlet. The French handbag shop has a turnover of about £15,000 a month. “We’ve been open two years, but there has been no improvement.” The mall’s management company had to abandon a plan to open a car centre because the market is so glutted that prices have nosedived. China’s factories can turn out 2m more cars than the market demands.

  • Posted by Guest

    Euro surplus disappeared when oil started rising. no mystery there.

  • Posted by Peter

    Let me see if I can be a little bit outrageous on this topic.

    Economists are accustomed to thinking in Hotelling-ish terms about scarce natural resources. (This despite the inroads elsewhere of public choice econ.) The state is thought of as trying to maximize the present value of the stream of rents generated by its resource stock; this gives rise to a particular extraction and price path. At the margin the decision-maker compares an additional unit of extraction (which generates income that earns a market return) to leaving the unit in situ and allowing it to appreciate as scarcity increases. If this were the case, resource rents would always be put to their most remunitive use. (Otherwise what’s the point of the comparison?)

    But let’s suppose instead that the major oil exporters are kleptocracies. Political elites control the resource, and they receive a percentage of the rent as personal income. Suppose they have short time horizons, perhaps because their continued monopoly of the resource is highly uncertain over longer time horizons. They maximize their income by maximizing revenues in each current time period. Only the short-to-medium run price elasticity of demand matters for their calculations, not expectations of greater future scarcity rents.

    These elites would logically park the portion of the rents they don’t capture personally in dollars, because the US is the most accommodating consumer of petroleum. Its demand is least elastic and seems to just go up and up as it depletes its own domestic supplies. This logic applies even though putting all this loot in dollars in questionable for the society they ostensibly represent, not only because of the general argument for diversification, but also because it is obvious to everyone that the dollar will decline significantly in value in the not-distant future. Only their own personal stash (which is presumably a small share of the total rent although a very large quantity of lucre) would be invested for highest expected return.

    This would explain why the petroleum exporters have always been such efficient recyclers. Sustaining demand trumps sound portfolio strategy.

    Is this a model?

  • Posted by http://nihoncassandra.blogspot

    Given the difference in energy intensity per unit of GDP between the US and Eurozone, the yawn tracks the steep rises in both energy and raw material prices over the past three years and the large and growing fiscal & trade gaps in the USA. There are no inconsistencies here. The reality highlights to me the impact of pro-active policy measures (taxes included) upon energy efficiency and consumption. One way to view it is that over the past two decades, Europe & Japan have sacrificed present consumption-oriented growth for the future benefit of greater energy efficiency and less oil price sensitivity. All the while, the US chose to sing like the Grasshopper (because that’s what the people wnated). And over the past three years, rather than adjust or sacrifice to the reality of peak oil and resurgent BRICs, they’ve simply borrowed to make up the difference such that from an efficiency adjustment point of view, the USA is really no closer to where it needs to be relative to its consumption and citizens’ expectations.

    My guess is the that Eurozone deterioration reflects the reality that they retain modest sensitivity to higher energy prices, combined with post Euro integration induced inflation, causing Europeans to become more price sensitive, in order to make up the difference. And the hypermarket big-box retailers know precisely where to source the goods to entice consumers without adversely impacting profits.

    The more interesting question is: what happens when their cap goods exports to both NAm and Asia fall off as the ripples from US housing hiccups are felt. I have felt for some years that the Europeans will react more agressively than the US has to such deterioration on their trade front, raising the spectre again of Southern-Europe style competitive devaluations or devolution into regional trade blocs. Food for thought…

  • Posted by Gcs

    sure the euros and the japanese
    oughta bare a far bigger share of whatever north south imbalance there is

    but the south needs to increase its north imports
    period
    and shrink the aggregate imbalance
    for this to be anything but a game of northern
    pass the stinkers

    and here’s the lose lose

    if global effective demand is not maintained
    (and recently
    uncle sam has been the sole
    agent
    in
    this bring it here we’ll buy it
    business )

    then closing the n/s gap may be
    at the exspense of short run global growth

  • Posted by Guest
  • Posted by Amateur Econ

    We will all praise the aristocrats from the oil exporters when we pass the oil peak.

  • Posted by Guest

    “…Thomson, a unit of electronic publisher Thomson Corp. of Toronto, says U.S. consumers’ reaction to either a hard or soft landing in housing “will determine the timing and magnitude of the next recession when it inevitably arrives.” But numbers its researchers have crunched lead them to support the school of thought that says capital spending is for now offsetting the impact of the bubble’s collapse on the world’s largest economy…” http://www.globeinvestor.com/servlet/story/GAM.20060823.ROUTLOOK23/GIStory/

  • Posted by Dave Chiang

    Hi Brad,

    Add this to the list of the Federal Reserve problems. China starts to ship higher inflation costs abroad. Of course, the Federal Reserve is directly responsible for the economic quagmire the nation is in. It was totally irresponsible for the Federal Reserve to accomodate and nurture a massive credit bubble in Housing. It was reckless to provide an almost limitless line of credit to Fannie Mae and Freddie Mac. Now we are facing the worst of both worlds; stagflation. We have soaring energy costs, rising import costs, the collapse of the industrial base, and the implosion of a real estate bubble that will drown the American consumer.

    China starts to ship higher costs abroad
    http://www.iht.com/articles/2006/08/23/business/bank.php

    ” As the Chinese economy races forward, signs are multiplying through the global flow of goods from suppliers to manufacturers – and deep in some statistical tables – that the Asian giant is beginning to slow its exporting of something dear to the hearts of the world’s central bankers: lower prices.

    For at least a decade, China has provided a welcome tail wind for inflation fighters in Europe and the United States by supplying inexpensive goods that depressed overall price levels.

    But more and more this year, China’s role in global disinflation – as the phenomenon is known to economists – has toughened the agenda for central bankers. Striking anecdotes and evermore statistical evidence suggest that China’s contribution to low prices may be ebbing.

    And that, combined with more expensive raw materials like oil, means that central banks once again could be stuck with the painful dilemma that they faced in the early 1980s: to stop inflation by tightening credit, despite the potentially negative effects on economic growth and unemployment.

    “Even in China, with its growing manufacturing base and large pool of labor, some indicators are showing upward pressures on export prices,” Mervyn King, the governor of the Bank of England, said in a recent speech. “And in turn that is raising our import prices, over and above the increases resulting from higher energy costs.”

    Regards,

  • Posted by Guest

    Have to wonder where all these cars are going:

    “…The American consumer is taking a well-deserved break, after a multi-year spending spree. Interestingly, though, the number of Canadian cars actually being exported has been growing. Dollar values have been declining because of a combination of low pricing and the strong Canadian dollar, which translates weak U.S. prices into even weaker Canadian dollar prices. But the physical number of automobiles being exported was up 13.8% in June compared to last year…” http://www.edc.ca/english/docs/ereports/commentary/publications_11621.htm

  • Posted by bsetser

    Peter — I couldn’t quite figure out your model. If the model is vendor financing a la chinois, yes, you finance your best customer … and don’t worry too much about whether or not that financing will lower your (long-term) returns relative to selling your oil for goods (mercedes) or selling oil to buy euro or s. franc or RMB denominated bank accounts. you are interested in generating current activity, even if that has a long-term cost (China wants exports and export jobs today, and will leave it to the next generation to foot the bill for the export subsidy). I see how that partially fits the oil exporters, but the fit is only partial — if you are a rent maximizing kleptocrat, you want to maximize your the long-term value of your personal stash. which suggests holding a real hard currency, not the currency of a country with a massive trade deficit.

    I suspect that inertia plays a bigger role in all this than all of us efficiency maximizing economist would care to admit. oil is sold for dollars, so if you do nothing, you have a dollar revenue stream and if you are taking in more than you spend, a growing dollar bank account. getting out of dollars takes an active decision.

    if you are kleptocrat, there is also a well-developed dollar based hedge fund business that promises you big returns on your dollars, for a modest (irony intended) fee …

    the fact that the $ has a bit more carry than the euro also helps, as does the fact that local prices are dollar prices in most of the gulf …

  • Posted by Gcs

    brad
    i think peter’s model has two streams
    the main revenue stream
    coming from the faster then optimal pump and sellstream a gets the dollar roll overtreatment
    stream b the skim
    gets the hedge treatment

    the idea is simple enopugh
    consider stream a as the means to max stream b
    the “agency “problem here is obvious
    and peter has his finger right on it