The US and Chinese trade data
China reported a large $25b trade surplus for August.
The US reported a roughly $60b trade deficit for July, with strong exports offsetting a rise in the US oil import bill.
Same old, same old.
Chinese exports were up 22.7% in August, down from the very high 34% in July. I think it is too early though to argue that there is strong evidence that Chinese export growth is slowing – the weak August might be payback for the strong July. The three month average y/y growth rate has stayed around 27-28%.
Imports were up 20.1%, a bit less than in July, and right in line with the three month average.
Project the current three month average growth rate for imports and exports out for the full year, and Chinese export will reach about $1240b – with imports at around $950b. The resulting $290b goods trade surplus (customs basis) is consistent with a $350b or more current account surplus.
It is pretty hard to argue that net exports haven’t been a key force pushing Chinese growth up to its current stratospheric (12%) levels.
Indeed, I have been surprised that China’s leadership has continually prioritized export growth over domestic macroeconomic stability. The persistently undervalued RMB is a big reason why China now has a very frothy stock market, 6% inflation and negative real rates.
The way China has opted to integrate into the global economy is a real issue. Its continued prioritization of export growth has had a huge impact on the global economy, not just the US economy. Lots of other emerging economies now fear letting their exchange rate rise because they fear Chinese competition. Something will have to give soon though. China’s exports are on track to rise from $265b in 2001 to $1240b in 2007. That is a huge — $ 1 trillion – increase. If you project current (3m average) export growth rates out for two more years, China’s exports will reach $2 trillion; project out three years and it is $2.6 trillion.
I really don’t think that is possible. The law of large numbers will kick it. I thought that back in 2004, and was wrong. But the sheer scale of Chinese exports now is really so big that sustaining very high growth rates seems next to impossible.
US petroleum imports rose to $27.2b in July – close to where they were last summer. The average price of imported oil was around $65.5 a barrel.
Non-oil goods import growth also picked up a tad, to 6.3% (y/y). But export growth was very, very strong (close to 16%), pulling the non-oil deficit down – and keeping the overall deficit stable.
The three month average growth rate of exports is about 12.5% — well above the 5.5% average for non-oil goods imports (I haven’t calculated non-oil goods and services imports, sorry). That is a combination that, if sustained, will bring the non-oil deficit down over time.
The same forces propelling Chinese export growth – the weak dollar and still-strong global economy – are also propelling US export growth. Those same forces are also a key reason why oil is high. Take away strong global growth and both US export growth and the price of oil would be lower.
The overall US trade deficit has been pretty stable at $60b a month this year ($720 or so for the year) while China’s trade surplus has been rising. The same is broadly true for the US current account deficit and China’s current account surplus. I would be a lot happier if the US deficit was falling and China’s surplus was stable.
By following the dollar back down over the past two years (against many currencies) China has boosted its own economy when it didn’t a boost. And it has put itself in a position where it singled handedly will finance about ½ of the US current account deficit.
Just a quick comment
Why are you surprised that China’s leadership has continually prioritized export growth? Contrary to the Western held view of a Chinese unitary dictatorship, in reality there are numerous factions within the Chinese Communist party stucture that compete for influence and power. The days of Chairman Mao single handily dictating economic policy are long gone. Since they provide a huge tax dollar base for the Central government and vast employment opportunities for the 1 billion plus population, the export manufacturers represent a powerful political bloc within the Chinese government.
The expansion of the Chinese trade surplus is primarily a function of globalization with US corporations outsourcing production to the Chinese and other low cost production sites. For instance, Apple and Cisco entirely outsource their production to Asian contract manufacturers. IBM has shifted its global procuement headquarters from New York to Shenzhen, China. Even Motorola has solds its semiconductor production factories for its cellular phones to Semiconductor Manufacturing Industrial Corporation (SMIC) based in Shanghai.
DC: I think you are contradicting yourself. China is not a unified dictatorship which means that economic policy in China (just like everywhere else) is a weird combination of disparate interest groups. I doubt anyone in China ever made a conscious decision to prioritize exports or to create a balance of payments that is as large as it is.
An any case, I think that things are going to change in China in the next several months. The latest CPI figures from China seem to indicate that China can simply no longer absorb any more cash from overseas without triggering inflation, so I think you are going to see a reduction of outward capital controls and major movements in the RMB in the next few months.
Sustaining very high growth rates isn’t next to impossible when a significant aspect of the “growth” is monetary dilution.
Aka, “inflation.” Although what this word really means today is “official CPI number,” its previous meaning having departed for the little word graveyard in the sky, and it’s difficult to see why anyone who has any skepticism about the quantity of subprime on China Inc.’s balance sheet would even be interested in its CPI numbers. Which is easier to fudge - a balance sheet or a price index?
Of course, because of Cantillon effects, no price index has any predictable relationship to monetary dilution. But that’s another story. Today’s official price indexes are political instruments for signalling the market, just like Fed remarks or Jim Cramer - who, I am very confident, is a mere puppet in the icy, inexorable grip of the Plunge Protection Team.
It is easy to see this, for example, by the exclusion of real estate prices from all of today’s CPIs.
Forgetting other asset prices - which after all do have a sad tendency to measure demand from Russian oligarchs and mark-to-model billionaires, a very real segment of the economy, but one which tends to neither deliver votes nor assemble circuit boards - even if you are specifically trying to measure the goods purchased by a specific set of laborers in order to construct a guess of the labor supply curve - you have no conceivable reason to remove residential real-estate prices from that basket. At least, no nonpolitical reason.
Twofish,
Read carefully, I wrote China is NOT a unified dictatorship. I wrote, “Contrary to the Western held view of a Chinese unitary dictatorship, in reality there are numerous factions within the Chinese Communist party stucture that compete for influence and power.”
No one in China ever made a conscious decision to prioritize exports to this extent, or to intentionally create a balance of payments that is as large as it is. However, the Chinese utilize a state-driven model of economic industrial development that is vastly different than the US Neo-liberalism finance model that has largely deindustrialized the US economy.
The Administration of Hu Jintao plans to retain state-ownership of strategic industries that retain a monopoly presence in major sectors of the Chinese economy. PetroChina, CNOOC, China Telecom, Sinopec, CCTV Corp, AVIC-1, AVIC-2 and many others will retain majority state-ownership.
I agree that you will see a reduction in outward bound capital controls such as permitting Chinese citizens to invest on the Hong Kong stock market, but I don’t agree that the China PBoC will significantly speed up the pace of yuan revaluation versus the US dollar. A significant percentage of the inflation increase was from soaring meat prices caused by a fatal disease among livestock animals.
DC: However, the Chinese utilize a state-driven model of economic industrial development that is vastly different than the US Neo-liberalism finance model that has largely deindustrialized the US economy.
The reason that the Chinese economy works is that the economic and political leaders don’t believe in “models” but rather in doing whatever works. What you end up with is different from the US, but it is also different from Japan, southeast Asia, and every other economy in the world. You can find some similarities with Singapore, but I’d argue that you’d also find a lot of similarities with the United States.
DC: The Administration of Hu Jintao plans to retain state-ownership of strategic industries that retain a monopoly presence in major sectors of the Chinese economy.
True, but they’ve sold off large stakes of state industries outside of strategic sectors. Within the remaining SOE’s, the structure that has evolved is much more American than Japanese. The SOE’s have been divided into corporations which are intended to compete with each other in the market with the state being a passive shareholder. There are restrictions on bank ownership of corporations which keeps the economy from a German/Japanese model of interlocking corporations. There is no national authority that has anywhere close to the power of MITI. Also, the fact that the different state-owned enterprises are owned by different levels of government also introduces a dynamic that is far different than that of Japan or anything in Southeast Asia.
As with the exports, a lot of this was “unplanned.” A lot of the key decisions as far as industrial restructuring were made post-Japan bubble but pre-Enron, and involve delicate (or not so delicate) compromises between different people and levels of government.
But to argue whether the Chinese economy is like one economy or another misses the point. It’s different.
DC: A significant percentage of the inflation increase was from soaring meat prices caused by a fatal disease among livestock animals.
It’s not either/or. In order for the livestock animal price to trigger inflation, there has to be a pool of liquidity. If there weren’t large pools of cash, then price increases in one sector would have been balanced by decreases in another.
DC: balance sheet would even be interested in its CPI numbers. Which is easier to fudge - a balance sheet or a price index?
A balance sheet is much easier to fudge. The thing about price indexes is that you know that the numbers are wrong when you take a walk on the street and what you see with your eyes doesn’t match what is being reported.
Twofish,
It is not an accident that the Chinese economy more resembles the Singapore economic structure. Former President Jiang Zemin was an strong admirer of the Singapore Economic model. Current President Hu Jintao can’t completely ignore Jiang Zemin to this day on many policy issues. Numerous Chinese government officials travel to Singapore to be instructed on industrial and economic policy. Based on the Japanese economic model, Singapore retains a strong state-driven Industrial policy with the state pension fund ownership of its national economy. It should not be a surprise that the editors of the Wall Street Journal despise the Singapore government almost equally as much as the Chinese government. And if it wasn’t for 9/11 terrorist attack, the Neo-cons planned to bait the Chinese into a new Cold War. Note that even Singapore Airlines is still majority owned by the Singapore government and state pension fund.
Twofish,
True, A balance sheet is much easier to fudge. I don’t believe the US government statistics on inflation with Gold, Energy, and commodity prices soaring. But the Joe6pack American public still believes US government disinformation statistics echoed by the US mass media that US inflation remains below 3 percent. Like the non-existant Iraq weapons of mass destruction, if you tell enough lies repeatedly, sooner or later, everyone believes it. A majority of Americans still believes that Iraq really has weapons of mass destruction.
Twofish,
I am not DC! You can add all kinds of meaningless instruments to a balance sheet, but the list of stuff you own is the list of stuff you own. The statement “SAFE holds no securitized subprime loans” is a statement of fact. It’s true or it’s not. It’s checkable and reproducible.
Walking around on the street and seeing what stuff costs, however useful it may be to an intuitive decisionmaker, does not generate reproducible facts.
http://news.yahoo.com/s/afp/20070905/pl_afp/apecsummituschinatrade_070905072207
Economists have argued that a more expensive Chinese currency would not do much to shrink the overall US deficit as American importers would just move to other low-cost suppliers in different parts of the world.
They have argued that core issues include the unwillingness of the Chinese people to spend more on consumer goods, and conversely, an unwillingness on the part of many Americans to save.
well, i am an economist — tho not half the economist that martin wolf is — and we have both argued that china’s growing savings surplus is a direct consequence of its undervalued RMB. and the US trade deficit with Europe is now shrinking while the us deficit with china isn’t — and at least part of the reason seems to be that exchange rate. I don’t quite know when economic journalists decided to embrace the exchange rates don’t matter argument.
I think you can show relatively easily that china’s savings surplus stems in part from policies adopted to support the rmb’s undervalued position (i.e. to sustain the real undervaluation that came with the de facto $ peg/ now slow crawl v mostly the $), and high levels of consumption in the us are clearly not unrelated to the availability of cheap financing from the rest of the world, not the least china.
and also think what would happen if production shifted from high savings china to low savings mexico — the net effect would be a lot more demand for imported goods and a lower us deficit. so even if there was just a reallocation of production out of china, there would be an impact on the global equilibrium.
not to mention the fact that china is clearly moving into machinery production that competes with the us and europe not just other poor coutries.
don’t get me started on the widespread embrace of the global imbalances really have nothing to do with the rmb conventional wisdom among many journalists, it is one of my pet peeves.
I would be more than happy to bet that if China allowed the rmb to appreciate to its market rate, the us deficit would end up smaller than it would be on a no adjustment trajectory (tho there would be a j-curve effect).
China Korea Japan are one way street capitalists. They produce others buy. They get rich others get poor.
The U.S. has allowed one way streets to develop and encouraged one way streets to develop. What country started outsourcing jobs and tax base and substituted it with bubbles. Guess? Why doesn’t the U.S. Government get outsourced ? That would be the ultimate example of capitalism and globalization and everybody would be much better off.
Come on Brad. Americans have been orgy of conspicious overconsumption in the past decade. In my neighborhood of New Jersey, some of the Houses recently constructed in these McMansion developments simply boggle the mind. Personally, even if I had the money, I couldn’t imagine living in some of these Houses that are literally the size of some Hampton Inn hotels. It’s really a stretch of the imagination to believe that the monetary policy decisions of the China PBoC has had any impact on the financial decisions of the typical American consumer with a negative savings rate, and thousands of dollars on high interest credit cards. Economists assume that U.S. consumers make rational decisions which is almost never the case. By contrast, Chinese savers both in China and the United States have equally high savings rates despite negative interest rate yields. Cultural preferences for either saving or not saving cannot be incorporated into those Economist black boxes.
moldbug –
the statement that safe doesn’t hold subprime really isn’t possible to verify if you aren’t inside SAFE. The gaps and time lags in the us data are such that SAFE could hold a fair amout of MBS repackaged as CDOs and it wouldn’t register in any publicly available data.
The fact that China can keep its currency undervalued whether the US likes it or not is good proof that the balance of economic power has shifted. As if we didn’t know that from the fact that Paulson has gone hat in hand to China numerous times, promising results and ended up with NOTHING. The US is no longer the prime mover in international finance but that fact has yet to dawn on US politicians.
To DC: The Chinese economy doesn’t particularly resemble that of Singapore. Even if China wanted to resemble Singapore, it couldn’t because there are too many differences (national size, agriculture versus commercial, etc.)
Even in areas where China is obviously copying Singapore, it can’t do it completely. For example, the state investment corporation is modeled after Temasek and the GIC. Difference is that Temasek and GIC have tens of billions of dollars to invest while CIC is going to have hundreds of billions, and so the strategies that work for Temasek just won’t work.
China is just too large for central planning to work like Japan and Singapore. There are provinces of China with almost the population of Japan, and they have their own industrial enterprises which they try to keep the central government away from.
Moldbug: The statement “SAFE holds no securitized subprime loans” is a statement of fact. It’s true or it’s not. It’s checkable and reproducible.
Heh. Heh. Heh. It’s surprisingly easy to make that statement ambiguous. Define “holds”
Moldbug: Walking around on the street and seeing what stuff costs, however useful it may be to an intuitive decisionmaker, does not generate reproducible facts.
But it keeps you from losing touch with reality. It turns out that reality is very complex, and numbers are only one way of getting in touch with that complexity. The idea that one should ignore what one can’t quantify or what isn’t reproducible can get you in a lot of trouble.
DC, if people are knocking down houses and building McMansions in your neighborhood, then you are sitting on an expensive piece of ground with very high property taxes. If you own that house, and with what you know about economics, why not sell it, make money the money and rent something else?
Twofish - “Heh. Heh. Heh. It’s surprisingly easy to make that statement ambiguous. Define “holds”"
Exactly, and that’s what’s at the core of the whole subprime issue. Even definitions for the “easy” stuff on the balance sheet (eg. inventory) can get pretty squishy sometimes, but when you get into chains of contingent liability and counterparty risk for illiquid and opague securities in stressed and overleveraged markets, hilarity ensues.
No, you can’t verify what SAFE holds, because it doesn’t release that data. I meant verifiable in more of a philosophy-of-science sense.
The point is that (a) someone knows, and (b) the question can be precisely defined. I can see how a Chinese agency such as SAFE could get away with prevaricating on this issue. This would be much harder for a US government agency.
Whereas it is impossible to even define the question of whether a price index is, or is not, “fudged.”
As for chains of contingent liability and counterparty risk, if SAFE is involved in this stuff, it’s even less SAFE than most of us think!
And as for:
It turns out that reality is very complex, and numbers are only one way of getting in touch with that complexity. The idea that one should ignore what one can’t quantify or what isn’t reproducible can get you in a lot of trouble.
I couldn’t possibly agree more. This is the problem with Fisherine price indexing: it’s an ineffective solution to a very real problem.
I always wondered how real estate could be excluded from CPI. Most people need shelter.
Asia suffers from a complete lack of transparency and it doesnt emphasize financial profits in its economies. China has a large CA deficit to shield its self from its hopelessly crappy banking system. Its about nationalistic goals not absolute profit and losses. The US has plenty of problems right now, but if there is a bad recession then Asia will get crushed.
Regardless the whole system is beyond repair. Farmland seems like a good investment right now.
shrek — methinks you can make a persuasive case that the rapid liquidity growth associated with china’s large external surplus is adding to its banking troubles, not reducing them.
external reserves would help if bad banks led to big capital outflows (in excess of the $350b current account surplus), but they really aren’t much help if the banks are just making a bunch of plain old bad loans. the use of reserves for bank recapitalization is a really a mirage (I could explain, but it takes a lot of time). you really need domestic assets tho –
moldbug: The point is that (a) someone knows, and (b) the question can be precisely defined.
Not necessarily true. When you talk about large organizations with complex financial holdings then it is quite possible that a) no one person knows the exposure and b) that the amount of risk and holdings can’t even be easily defined.
This is why Hayek and von Mises are right and why command economies just don’t work well.
It’s actually easy to see if the price index is fudged. I have a notion of what 0% inflation looks like, 5% inflation, 10% inflation, 100% inflation. Take a walk. If the index has some coorelation of what I think the world looks like, then its useful. The thing that you can do is to write down a number and then you can do things like trends. Of course the hard part is to get an index that matches what people think a certain amount of inflation should be, and that is a lot harder than it sounds.
Hi all,
when Brad said that China’s CA is still increasing while US’s is stable, I immediately thought that someone in the world must be becoming the new Chinese “t-shirts importer”.
However, it’s hard to assess who this might be because: 1) we don’t have bi-lateral trade data for all countries; 2) even if we found out that someone’s current account is rapidly deteriorating (see for example France and Spain among big economies) we could conclude from this that they are increasingly importing from China (also becasue, ideally, someone may be switching its imports from another country to China possibly without changing its overall external balance).
Anyhow China must be selling those goods to someone else, but this has not yet been Europe in my view. Europe’s Trade Account has improved, overall, in 2007M6. But, on the other side of the coin, at Morgan Stanley they say that China’s future exports will go to Europe. This is why, they conclude, China may de-couple from the US in case of crisis and keep on growing.
This is interesting: if China’s big client becomes Europe, and if US’s currency devaluates and/or US demand fall, the US will also less importing from Europe (recall: Europe’s export to the USA have always been greater than many people thought). Bottom line: Europe’s Trade account will likely deteriorate sensibly.
This is probably why Almunia (EU’s chief) said today that Europe’s forecasts aren’t too optimistic for the following years (also because it seems that those at the ECB don’t want to cut rates as one of their international colleagues seems to be willing to). It seems though that Europe will definitely be worse off.
Brad,
in one of your comments of yesterday you said that sterilization may have become unsustainable due to inflation increases (>6%). Now, one possible solution to this might be: further sterilization (FX going up at exorbitant rates), which is consistent with further CA surpluses (the ones you deem — perhaps rightly so — as ‘impossible’).
The thing is: I personally don’t know what’s in China’s mind. Such future path seems really unsustainable for China (at least as unsistainable as US foreign indebtment). It seems as if Europe, USA and China are all unable to get out of their inertia. Maybe the multilateral approach (as in many IMF papers) to resolving such inertia might be the best solution.
Best
Bernardo.
Until the U.S. government begins to adequately enforce its trade laws, and hold China accountable for illegal trading practices such as currency manipulation, you’ll see the U.S. trade deficit with China continuing to rise.
http://www.manufacturethis.org
Bernardo — the oil exporters current account surplus is falling, and eastern europe’s deficit is rising. i would look their for the counterpart to china’s rising surplus. Europe is more than the eurozone.
as for sterilization, i think the issue is that increasing sterilization may be difficult w/o pushing up rates, as china may be reaching the limits of how many cheap bills it can force the banks to buy. plus, if the money created by faster reserve growth flows into stocks not banks, sterilization is a bit harder — at least below market sterilization, as the PBoC cannot just sell to a captive market.
2fish,
Frankly, I’d like to see that kind of accounting be a thing of the past, and recent events encourage me, perhaps unwarrantedly, in that speculation. If you can’t even construct an accurate balance sheet, your IT guys need to go, if nothing else.
I have a notion and you have a notion. We all have notions. The trouble is that notions are not data, which wouldn’t matter so much if people didn’t insist on plugging them into equations. (For “real” values instead of “nominal” ones. Read “fudged” for “real” and “actual” for “nominal,” and your connection with reality will be substantially improved.)
Brad:
Sure hope you post on Bernanke’s Berlin speech.
Of course, you may have to work through a bout of puking after reading it.
Anyway, look forward to your thoughts.
Cheers,
Anyone knows how China’s GDP deflator has developed? Has it also been rising quite sharply during the course of the year?
Brad, among European countries (EU-27) whose CA is most rapidly deteriorating, 2 are Euro area countries (Italy and Austria). The rest are Eastern countries.
So I wouldn’t worry about such a situtation because it reflects the old theory on international political economy (the poor borrow from the rich, the rich being now china which is rapidly graduating as a central country). It may account for the re-inversion of the already inverted geo-economic equilibrium (where the USA, the center, borrowed from the periphery, China).
I would worry instead if the Euro would get stronger and Germany, France, Italy, Spain, etc. would import more and more goods from China (which would account for the mere tranfer of the deficit problem from the US to the Euro-area).
I think China will also push up rates in an effort to boost internal demand. You probably know this better than me: it may occurr that if you raise rates, people’s savings decrease because they need less stock of saving to get the same future disposable income. Hence, present consumption increases. It may be a policy option, along with continuing sterilization.
I’ll have a look at Bernanke’s speech now.
Best
moldbug: Frankly, I’d like to see that kind of accounting be a thing of the past, and recent events encourage me, perhaps unwarrantedly, in that speculation.
Accounting and law involves imposing some sort of order on the real world. Because the real world is complex, accounting and law is going to be very complex.
moldbug: I have a notion and you have a notion. We all have notions. The trouble is that notions are not data, which wouldn’t matter so much if people didn’t insist on plugging them into equations.
Notions are data. If you put someone on a street corner and ask them for their impressions and listen carefully, that can tell you a lot of things. I learned this in the 1980’s with the Soviet Union, the fact that the Soviet Union fell came as a shock to a lot of people who looks at the data, but people I knew who actually visited Eastern Europe could tell that the economy was just falling apart.
Equations have their place, but they can be horrendously misused.
Twofish and moldbug–notions are important: in Germany the inflation rate is calculated not on actual numbers but on how people feel the prices are going. Germany has long been one of the most effective inflation targeting economies–no wonder that the ECB has been drawn upon the former Bundesbank.
But notions are also tricky, becuase they are relative: what is good for me may be bad for you. And what is sustainable for you might be unsustainable for you. Imagine what would happen if the US CA deficit issue would be treated on the basis of notions: no policy could be adopted because no prevailing notion has yet emerged. Data in such cases are important, and they are essential to create forecasts and strategies. The thing is data are difficult to understand–one number may tell everything and nothing. And sometimes data research misses counterfactual analysis–not only because of the researcher’s fault but becuase nobody yet knows what may be going on in the economy.
“For the second straight month the US trade deficit fell slightly according this morning’s BEA trade data. But the surplus in intangibles went in the wrong direction…”
http://www.athenaalliance.org/weblog/
“…over half of the information investors want is not reported on the balance sheet. Left out are important items such as growth opportunities, infrastructure, intellectual capital, network effects, workforce and in-process R&D…” http://www.athenaalliance.org/apapers/ReportingIntangibles.htm
“…this recovery is extraordinarily dependent on exports. While Japan is steadily shifting its exports from the US to Asia, Japan’s ability to export to Asia hinges on Asia’s own ability to export to the US… If Japan’s exports to Asia and China, which buy 40% of Japan’s exports, were mainly for the domestic market, they would correlate with the ups and downs of these nations’ GDP. Instead, they correlate much better with Asian/Chinese exports to the US. If a US downturn caused the US to cut imports from Asia, Japan’s own export drive would stop in its tracks. Far from becoming “decoupled”, Japan’s economy has become even more dependent on US growth…” http://www.ft.com/cms/s/0/a0664b06-60c8-11dc-8ec0-0000779fd2ac.html
http://www.rense.com/general78/amecon.htm
“Recently an economist, Susan Houseman, discovered that the reliability of some US economics statistics has been impaired by offshoring. Houseman found that cost reductions achieved by US firms shifting production offshore are being miscounted as GDP growth in the US and that productivity gains achieved by US firms when they move design, research, and development offshore are showing up as increases in US productivity. Obviously, production and productivity that occur abroad are not part of the US domestic economy.”
Guest: Obviously, production and productivity that occur abroad are not part of the US domestic economy
Not obvious at all. When I have a conference with people in England and Hong Kong about a tech support issue, whose economy is that being counted as part of? If move parts production offshore for production of a product that is finished in the US, then it’s not obvious that that doesn’t count as a productivity boost for the United States.
move parts production offshore for production of a product that is finished in the US, then it’s not obvious that that doesn’t count as a productivity boost for the United States.
It’s very obvious thats not the case. bsetzer will confirm.
The criminal Enron Corporation filed for bankruptcy protection on December 2, 2001. Yet none of the creative accounting issues on Wall Street balance sheets were ever rectified. Two-thirds of reported profits derive from mark to fantasy theory estimates on non-marketable financial derivatives. Greenspan bought the US Economy time by unleashing the housing bubble. Today, the problem is essentially the same except the scale has multiplied 100 fold. The next bubble will be hyperinflation. Perhaps our Federal Reserve central bankers will recognize that it is finally time to go cold turkey to stop this debt addiction.
“Institutions, who were unwilling to touch IFCI with a barge poll even a few years ago, now want to buy a stake in the company… DE Shaw, with assets worth over $30 billion, is believed to have put in bids in response to IFCI’s decision to sell a 26% stake in favour of strategic investors…” http://economictimes.indiatimes.com/Global_Markets/Now_US_hedge_fund_joins_race_for_IFCI/articleshow/2360446.cms
The ratio deficit with China/total deficit is rising (over 40%), and soon it could push higher US trade defcit overall.
I have a question: what will be the effect on US saving of the next FED easing? How much USA will need borrowing from abroad to compensate? Any thoughts? THX
Just wait until OPEC think the US Dollar is worthless litter too… they will demand more dollars for the barrels of oil. All import costs will rise per unit when the dollar declines. Inflation will skyrocket, maybe interest rates too. Then foreigners, who loaned us the 9 trillion dollars by purchasing our Treasury Securities (the bills, notes, and bonds) auctioned off previously, they will start to sell the fixed income, and our stocks. Consequently, the stock markets would drop sharply and heavily, like a ton of bricks from 25,000 feet, and interest rates would soar out to pluto, and bill/note/bond prices, they will drop quickly, along with the US dollar. Then Japan, the UK, China, the Cayman Islands, and Luxemburg, since they hold the most Treasuries and US Dollar denominated assets, they will also suffer in a big way when they tally up their losses.
“…Beijing has put itself in a trap. Letting the yuan float more freely would raise the cost of exports, slow the economy in the short term, and lead to joblessness, even unrest. Letting Chinese invest more money abroad would reduce the savings pool that Chinese banks rely on and possibly undermine them fatally. Damned if they do and doomed if they don’t, China’s leaders have some hard choices to make and they must make them soon. Rising inflation is just the smoke seeping out from under the door…” http://www.globeinvestor.com/servlet/story/RTGAM.20070912.wibasia12/GIStory/
“Qatar’s central bank governor on Tuesday said the natural gas exporter would keep its currency pegged to the US dollar…” http://www.euro2day.gr/articlesfna/42982859/
China already has allowed more overseas investment; its problem is that Chinese savers don’t want to take Beijing up on its offer to move funds abroad. More outflows = smaller reserve growth, but it wouldn’t kill the banks. the bigger problem the banks face is that they are having trouble attracting funds at the low deposit rate mandated by the PBoC.
I actually liked Bernanke’s speech (see my post) apart from the big on official flows.
and yes, outsourcing shouldn’t count as an increase in US productivity. though Larry Summers (as reported by Brad Delong’s blog) argues that if a US firm is able to capture the gains from outsourcing as an increase in profits (i.e. it cuts its production costs but not its sale price), the US data might show an increase in the productivity of the marketing and management folks Same value (sale price), but smaller inputs (production costs) = more productivity. There may be something to that.
It is in my view a mismeasurement — the marketing team isn’t doing anything more productively. but it still might register in the US data as a productivity gain.
Brad,
You have gradually convinced me that China’s exchange rate policy is a major cause of its surplus with the US, but I have to say that when I first heard the phrase “twin deficits” China was still behind the bamboo curtain. America has been consuming beyond its means for years. If it is not borrowing from China, then from some other country.
bsetser: China already has allowed more overseas investment; its problem is that Chinese savers don’t want to take Beijing up on its offer to move funds abroad.
They really haven’t been given a choice in the matter.
The QDII programs that allow most savers to save overseas just started in the last two or three months, and so far people have had no problems filling their quotas. If nothing else, Chinese savers can go and buy Chinese companies which are listed in HK or NYSE which are trading at huge discounts relative to the exact same share traded in Shanghai.
Currency restrictions effective prevent any large scale flows overseas of PRC funds. Yes you can bring suitcases of cash to Hong Kong, but this isn’t going to end up being macroeconomically significant. If you are a small investor, the transaction costs are going to kill you. If you are a really big investor (i.e. someone with billions), you aren’t going to violate currency rules and risk getting such down.
2fish,
Notions are good. Equations are good. Plugging notions into equations is like using a hairdryer in a swimming pool.
The real world is complex. But software is often more complex than the real world, and this is its own fault. If we think of accounting as it is today as software - which is basically what it is (we don’t have a digital financial system - we have a paper financial system that’s been ported to computers), perhaps we can allow ourselves to suspect that not all of its complexity is essential.
2fish — the government recently dropped repatriation requirements for chinese exporters, effectively allowing them to keep $ earned abroad overseas. and my sense is that the available QDII products generally have struggled to attract attention amid China’s own stock market boom.
The problem with QDII products thus far has been that they are fixed income products, which basically turn into currency plays. Just this morning the first stock QDII was approved, and it sold out immediately……
http://www.forbes.com/markets/feeds/afx/2007/09/12/afx4108401.html
Right now, equities in Shanghai are selling at huge premimums over overseas stock, and revaluing the currency is likely to make overseas investments even cheaper.
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