Posted on Wednesday, July 4th, 2007
By bsetser
Predicting things can be difficult, especially if you are talking about the future.
So the Yogi Bera cliché goes. It rings true.
Back in 2004, I was fairly confident that the US net international investment position (defined here) was poised to deteriorate significantly. That, after all, is what usually happens if a country runs large, persistent current account deficits. Their external liabilities rise faster than their external assets.
A paper that Dr. Roubini and I wrote in 2004 – a paper that incidentally is still by far the most popular thing I have ever helped to write – made this argument. We recognized even then that US had one big advantage than most emerging economies lacked: its liabilities are denominated in dollars, while many of its assets are denominated in foreign currencies (mostly the euro and loonie). That means that falls in the dollar improve the United States external position. The falling dollar increases the value of many US external assets without changing the value of (most) US external liabilities. But by 2004 the dollar had already fallen significantly against Europe and Canada – which are still the home of the bulk of US investment abroad (especially if you discount the Caribbean as an offshore tax haven) – and we argued that it was unrealistic to expect that the US would enjoy similar valuation gains going forward.
We were wrong. As the following chart – taken from the latest BEA data on the net international investment position – shows, the US net international investment position has actually improved since the end of 2004. Look at the red line. It has come back toward $2,000b ($2 trillion) since 2004, not gotten bigger — even though ongoing financial flows continue to add new liabilities to the United States external balance sheet (the blue line)
One note – in this chart, I used the data series that values FDI as market value. The series with FDI valued at historic cost is similar, but not identical.
So why did the NIIP improve since 2004?
Read the rest of this entry »
Posted in U.S. trade deficit and external debt | 35 Comments »
Posted on Tuesday, July 3rd, 2007
By bsetser
It seems like the rising cost of Bangalore software engineers is encouraging firms to produce more software in the US.
Part of the (large) increase in the relative salaries of Bangalore software engineers reflects industry-specific demand. There are only so many IIT graduates out there.
But part of the increase reflects the rise in the rupee's real value. The rupee has appreciated in nominal terms — particularly in 2007. And Indian inflation has been higher than US inflation, leading to a significant real appreciation.
In some ways, China and India are very similar. India’s household savings rate, for example, is quite high – actually higher than China’s household savings rate (per Kuijs). India is also experiencing an investment driven boom that has pushed its growth rate up. Indeed, one of the big questions in India is whether India can sustain its current (high) growth rate. Both the PBoC and the RBI have intervene rather consistently in the fx market, though the RBI is by no means as active as the PBoC.
But there are also important differences. India generally has run a modest current account deficit (India ran a small surplus in q1 on the back of lower prices/ strong export growth, but looks likely to swing back into deficit in q2). And India’s success has led the rupee to appreciate in both nominal and real terms – as one would expect. China is rather different. The RMB is still well below its 2001 level in real terms, and China exports about four times as much now as it did then and has a much, much bigger external surplus.
However, even in India there are limits. The government let the rupee appreciate from 44 to 40 – but right now, it sure seems to be holding the line at 40. Its intervention has stepped way up over the past four weeks. The RBI added over $3b to its reserves in the last week of May, and has bought $1-$1.5b every week since …
Pressure from exporters exists in India as well as China, though the interests that benefit from exports and artificially low domestic interests to help limit pressure on the currency do not seem to have captured Indian policy in the same way that they have captured Chinese policy …
Read the rest of this entry »
Posted in emerging economies | 33 Comments »
Posted on Sunday, July 1st, 2007
By bsetser
Large, opaque financial institution with a long time horizon and lots of cash to invest in anything that yields more than Treasuries, please meet an opaque, hard-to-value (and sometimes hard-to-sell) financial instrument that now looking for new (and perhaps less-leveraged) suitors ….
Felix writes:
I think that the move from public and transparent markets to private and opaque markets is more than a blip. CDOs are in the middle: they're public and opaque. Where do they move from here? One possibility is that they snap chaotically back to being public and transparent. But the other possibility is that they move in the other direction, and become private and opaque: that would involve being snapped up by pools of private capital which don't mark to market and which can invest with a long time horizon. Those pools are already being formed, and they could prove to be very popular.
Felix appears to be talking about truely private pools of capital with long time horizons. But the really big money with long time horizons often in state not private hands these days. Felix, Macroman and Steve Waldman ((interfluidity) have all suggested that China might help the Street out by buying up CDOs stuffed with various tranches of securities created out of subprime loans..
After all, a lot of of folks in the market got pushed into riskier products when China bid up the price of all sorts of less risky assets. If those riskier products don't turn out to be a great bet, it is only fair that China should come to the rescue …
I doubt Macro man and Steve Waldman thinks this really makes sense — even if China's State Investment Company might be able to buy some structures a decent discount. Felix, on the other hand, seems inclined to think it might be a good match.
Then again, Felix has always had a bit of a crush on the structured credit market. He generally thinks CDOs, synthetic CDOs, CPDOs and similar instruments that seem to be marked-to-model more often than naught (for good reason, according to Felix; why should the value of something as complex and beautiful as a bespoke CDO tranche be based on the last trade?) are a wee bit misunderstood.
Sort of like China's state investment company.
Posted in central bank reserves | 61 Comments »
