what happens if:

1. BOJ keeps the interest rates low like current, and keeps supplying money for the carry trade?
2. India and china dont let their currency appreciate and keep supplying cheap exports for-ever?
3. US currency keeps losing value with other currency except for india and china (or any other manipulator)

how long can it go??

i just read that New Zealnd(NZ) is having a tough time because of this carry trade since they are not able to control inflation and rising interest rate is not helping, any comments on this?

First of all, I congratulate you for this blog, specially, regarding this particular topic. Now, about the US current account adjustment, I believe you leave out some important considerations.

A huge USD devaluation (or protectionism -even as an imminent threat-) do changes economic agents’ minds all over the emerging world; because it implies THE CRASH OF THE UNIQUE BUSINESS PERCIVED AS SUSTAINABLE: net exports. Facing such a situation, demand of local currency would collapse while these countries outflow or “eat” their fx reserves (this is the final “decoupling” that you’ll see). So, speculators, traders, grocers, firemen, teachers and beggars shall press for CB’s exchange. As always, the herd reaction will include the hoarding of money out of the financial system. They will demand US dollar, euros or yens… ¡but never local currency!.

Or do you believe that a huge real US devaluation or protectionism will occur “ceteris paribus”? or “all the things equal”?…

When it happens, everybody wants money. Then, the inflows that US will need during the adjustment effort must be added to the dashing against CB reserves by emerging market’s people. So, US adjustment will face us with a liquidity restrain, which always ends in higher interest rates or an inflationary liquation of indebtedness -if central bank provide money-. And if both, US and emerging market economies want money at the same time, crisis becomes fatal or adjustment impossible. On the contrary, if demand of money grows so then interest rate becomes a key word. And if you want to rebalance, you’ll need similar level of real interest rates. Do you imagine the financial impact?…

Nobody must throw out neither an inflationary nor a deflationary stage. If a inflationary liquation of indebtedness take place, it might be directly proportional to bizarre excess of it. If so, US people shall look bad. Uncle Sam’s debt will impose much higher prices (¡prices, not wages!) or a longer and painful exposition to a more tolerable inflation -while the J curve works- to hold back real consumption. Politically harmless?…

Now, as regards US issuing of securities in yuan or any other currency which don’t work as value store, demand would be tiny (specially as counterpart of a real appreciation) because such revaluation destroys the income sources of whichever emerging country; AND NOBODY PURCHASE A SIZEABLE AMOUNT OF THE DEBT OF A COUNTRY WHOSE MOST PROFITABLE BUSINESS IS MELTING DOWN. Please, don’t forget it.

I’m an argentine. ¡One minute of silence for my immolated country, please!…

Argentina had no problem with contracts because my country didn’t respect any law (¡my fellows leave civilization and I ran away!). Besides, as you know, Argentina defaulted 75% of its liabilities. This default played as your expected huge real USD devaluation, except for a difference: our size is globally irrelevant but yours would bring awful global repercussions. Despite solve legal and financial questions so, Argentina’s poverty indexes skyrocketed till African levels… ¡along one of the best external stages in the history of this impoverished country!. Nowadays, the political system is destroying the official statistical bureau to lie freely about inflation, growth and poverty. So, try to imagine our “incredible miracle” when wind blows out.

Argentina isn’t a good example of external adjustment, but a good example of secular national suicide. Never doubt it…

Finishing, if a successful US external adjustment is hard (relative expansion of tradable sector WITHIN A WORLD ABLE TO BUY YOUR PRODUCTION), emerging world’s one is worst. This, for the following reasons:
1. Credit restraining imposes a delay in developing of a complementary greater non tradable sector (if we get it). ¡Of course, both, FX “eating” and real contraction excluded!…
2. According to my assumption, this need would face raising expectations -at least- of a future exchange crisis (what about incentives? do you believe we don’t need?).
3. In long term, emerging world isn’t able to increase domestic demand because it can’t issue debt in local currency (once again, the original sin); specially, when a huge real appreciation destroys current income.

I do apologize for my English. I talked enough…

Good luck and thanks!

BARUCH

Punctuated equilibrium is … mistakenly thought to oppose the concept of gradualism, when it is actually a form of gradualism, in the ecological sense of biological continuity. This is because even though evolutionary change appears instantaneous between geological sediments, change is still occurring incrementally, with no great change from one generation to the next.

i am buying into the fact that japan, china, india etc are causing a problem by manipulating their currencies….maybe they need the growth ….but they are getting it at the cost of others.

arguments aside, i was pondering over what may happen if;
1. BOJ keeps the interest rates low like current, and keeps supplying money for the carry trade
2. India and china dont let their currency appreciate and keep supplying cheap exports for-ever.

how long can it go??

can some one explain..how it will play out…step by step (sorry i am not a economy major, just a IT guy, so pardon my ignorence)

My view is that they’ve been there, done it and don’t want to do the labor intensive “dirty” jobs again, especially not seeing their next generations working in blue collar work but rather in Entertainment, News Media, Politic, Sales & Marketing, etc (If they did, both governments would have less tax revenues to play with (like the Iraq War), and less for increasing their pensions and salaries (very unfortunate for victims of Hurricane Katrina still with lack of government aid).

Greetings to D. Chiang. Nice to see you here, again! It’s always good to have someone walking on the other side of the wild or the wall.

I agree a lot with Anonymous ibid.

I’ve posted several references about US Army’s energy consuption, US Army’s share of USA budget and so on, but…

Here goes an interestin link about it. The latest article by Michael T. Klare:

http://www.tomdispatch.com/post/174810/michael_klare_the_pentagon_as_global_gas_guzzler

And a last link to the CIA facts book:

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html

What country is the last? And the one before?

Spain. Considering that housing is much more inflated here than in USA…

I don’t know if it will be a bang or wimper…

But it smells to a big bang.

Good night.

The US economy is geared towards overconsumption. US Economic growth over the past decade has primarily been a function of multiple, successive credit bubbles in the stock market and housing that have massively misallocated capital in the US economy. Easy credit was even provided to millions of individuals with less than stellar financial records (ie. think subprime mortgage fiasco with Federal Reserve regulators sleeping on the job ). Asset bubbles are equally dangerous as inflation in the misallocation of capital for any economy. Except for the US Federal Reserve which disavows that asset bubbles can even exist, most of the other world central banks specifically target dangerous asset bubble. For instance, the PBoC concerned about a developing housing bubble in Shanghai and Beijing, has raised interest rates, increased bank reserve requirements, increased housing down payment requirements, increased real estate transaction taxes, etc.

Regards,

as a macro level, if one sector (government, housing) reduces its demand for credit, the price of credit will fall to the point where folks supply less credit (clearly not happening with china, see its huge external surplus) or others start using more credit (right now: private equity firms, us companies gearing up to avoid being taken over). in equilibrium, so long as China is running a huge surplus someone has to run a huge deficit.

Much as it pains me to say this (I like bashing the bush administration as much as the next guy), it does seem that China has done less to help reduce imbalances (see its surplus, absence of real appreciation) than the US (falling fiscal deficit) over the past couple of years. So i no longer believe — unlike in say 04 — that symmetric criticism is fully justified. the US slowed. Europe is growing. the US reduced its fiscal deficit — there should be a lot more adjustment happening now.

instead both China and Japan’s current account surplus just keeps on rising …