Understanding the world through pictures: China, Japan, Europe and US current account adjustment
In December and January, the Financial Times (Messerlin/ Sally) and the Wall Street Journal (Charles Wolf’s December oped was reinforced in January by Bill Willby) and Foreign Affairs all published opinion pieces arguing that China’s growing trade surplus isn’t the product of the an undervalued RMB. I do not remember any comparable set of articles arguing that an undervalued RMB actually does influence trade flows.
The core argument of all these articles was that US or European pressure on China to allow the exchange rate to adjust was misguided as the RMB’s value has little impact on China’s trade surplus. However, there is growing evidence — in my view - from both the US and Europe the RMB’s value does have an impact.
The rise in Europe’s deficit with China since the RMB started to depreciate against the euro back in 2002 provides some of the most convincing evidence that exchange rates do matter. In 2002, EU-Chinese trade was in rough balance. In 2007, the EU is on track to register a deficit with China of close to euro 160b, or more that $230b. The 10 month deficit was over euro 130b. That is a big reason why China’s current account surplus is forecast to rise to $360b in 2007 by the World Bank.
But I want to set Europe aside and instead look at how various countries and regoins’ bilateral current account balances with the US have evolved over the past several years.
The housing boom initially pushed up the US deficit, and then the more recent slowdown has brought down the non-oil deficit. The overall pattern of US growth clearly shaped the overall evolution of the current account deficit. Exchange rates are not the only factor that matters.
But over this period there also have been large exchange rates moves. The dollar has depreciated significantly against the Canadian dollar, the euro, the pound and most European currencies. It has depreciated modestly against some emerging Asian currencies (notably the won and baht). And it moved by much less against the RMB and yen. The RMB’s roughly 13% appreciation against the dollar from 2002 through the end of 2007 (and a bit more since then — the total appreciation is now 15%) remains small compared to the moves in the euro and won - especially given the rapid growth in Chinese productivity.
What happened? Consider the following graph. The stacked colored area shows the total US deficit with (non-oil exporting) Asia. The lines show the US deficit with Canad and Europe. All data comes from the BEA’s interactive tables, and has been presented as a rolling four quarter sum.
The US current account deficit it isn’t coming down symmetrically. The US deficit with Europe and Canada is falling. The overall deficit with Asia has stabilized as the US economy slowed. The deficit with both China and Japan continues to grow. The divergent lines for Europe and China provide — I suspect — evidence that exchange rates matter. It is hard to explain the difference paths on the basis of differences in growth rates.
More detail on the evolution of the US bilateral current account deficit with various regions follows.
Of course, looking at the bilateral current account capital account data is not without its dangers - if you just looked at the capital account data, you would think the UK finances most of the US current account deficit. But in this case, the US data captures trends in the global data. The overall current account surpluses of China and Japan are growing, not just their respective surpluses with the US.
The current account balance is a bit different than the trade balance - the balance on income (payments on US assets held abroad less income for US holdings of foreign assets) and transfers also figure in. The income balance is particularly relevant for China and Japan given their large holdings of US assets - and for Europe, as the US has substantial investments in Europe and Europe has substantial investments in the US.
The graph for China shows that all components of the current account are contributing to the deficit.
It also shows that recorded capital flows from China are falling relative to China’s surplus - a development that likely reflects Chinese purchases through London and Hong Kong more than a major shift away from US assets. Note the gap between Chinese reserve growth and recorded inflows to the US that starts to develop after q2 2006. It isn’t a coincidence that the q2 data is the last survey. Chinese purchases will be revised up when the US data is revised this spring.
The same data is available for Europe and Japan for a longer period of time - and it strongly suggests that moves in the exchange rate do have an impact on the current account balance (with a lag).
The US trade deficit with Japan came down in the late 1980s after the adjustment in the yen dollar. the dollar’s weakness (v. the yen) in 1995 also seems to have had an impact.
The Japanese data does pose one puzzle: it appears that capital flows from Japan to the US disappeared in 2005 and 2006. That is a bit puzzling, given all the talk of the carry trade. My guess is that the US data fails to pick up some flows that originate in Japan, which get channeled through either London or the Caribbean for (again) a combination of tax and regulatory reasons. Just a guess though.
One other point that is worth highlighting - net Chinese purchases of US assets now are probably around 3% of US GDP, and that is all a state flow. That is meaningfully different than the flow from Japan in the late 80s. Japanese flows then never exceeded 1% of US GDP, and that was mostly a private flow.
The data showing the evolution of the US current account deficit with Europe paints an even cleaner picture. The bilateral deficit is coming down fast - just as it did in the late 1980s. And it is falling for the same reasons - -namely, a slowdown in US growth v European growth AND a big fall in the dollar.
The large swings in (net) capital flows from the US to Europe — that is European demand for US assets net of US demand for European assets - are worth noting. The data is a bit suspect - as lots of petrodollar flows go through Europe. But the data still tells a story - in 1997 and again in 2000, strong European demand for US assets (relative to US demand for European assets) pushed the dollar up. That demand broadly speaking has fallen substantially.
There is - obviously - a surge in European demand for US assets in late 2005. But that is an artificial peak - the Homeland Investment Act led American firms that had built up profits in low-tax European jurisdictions to bring their funds home. Trust me on this - the data shows a $300b swing in dividend payments on FDI during this period. That was the first clue - at least for me - that tax arbitrage plays a very large role in the US balance of payments data with Europe.
But even with tax arbitrage (booking as many profits in Ireland and Switzerland and the Netherlands as possible to take advantage of their low tax rates, setting up SIVS offshore so their profits are taxed at a lower rate and so on) shaping the US/ European data (the impact of this tax arbitrage is simple: it tends to increase gross capital flows and it tends to increase both the US trade deficit and the US investment income surplus with Europe), the US European bilateral balance still sure seems to reflect exchange rate moves.
This is easier to see if the capital flows line is dropped from the previous graph. I also superimposed data on the Asian balance and net petroleum imports on the same graph -
If the dollar remains weak against the euro and other European currencies, there is good reason to think the US bilateral balance with Europe will swing into surplus. An important adjustment is clearly underway.
The recent stabilization in the balance with Asia - by contrast - seems cyclical. It reflects a slowdown in the US relative to Asia. The broader adjustment required over time to bring the US-Asian economic relationship into better balance - and by that I mean that the US should export more, save more and rely less on Asian central banks and sovereign funds for financing - hasn’t really begun.
The recent improvement in the oil balance reflects the stabilization of oil prices (on a rolling four quarter basis) through the end of q3. The average price over the last four quarters was around $60 barrel (the average import price was lower). If oil stays close to 90, the oil balance will deteriorate by over 1% of US GDP over the next few quarters. Ouch
The hard slog of real adjustment hasn’t begun - not v. Asia, and not v. the oil world.
And here, the adjustment likely requires a lot more than faster growth in the rest of the world. Asia is growing quite fast. China especially. It hasn’t reduced the US deficit with Asia. Not when net exports are still driving Asian growth (Asia substituted European for American demand over most of the last year, though q4 looks a bit different). And fast growth globally - barring a major technological shift - means higher oil and energy prices globally. That works against the US even as strong growth helps exports: the US now imports a ton of energy.
Brad,
Whither global rebalancing if the countries that have been growing rapidly thanks to external demand continue to target exchange rates? Under-valued real exchange rates in these countries discourage domestic demand and prevent adjustment from tradeables to nontradeables. But if the U.S. economy slows–which it must if we are to have an orderly adjustment of external imbalances–where will these targeters get their external demand? Not Japan. Europe will substitute some, but for how long? Europe is talking confidently. But bravado notwithstanding, growth there will slow as the effects of the current credit market “troubles” spread.
The real risk is that countries managing exchange rates to generate current account surpluses (either to avoid the IMF, or to demonstrate their bona fides to financial markets) actually tighten policy in the face of weaker external demand to preserve these surpluses. That is a scenario for insufficient global aggregate demand.
In these circumstances, everyone should realize that the global economy can and should be a positive sum game. If we aren’t careful, however, we could transform it into a negative sum game. It has happened before; it can happen again. The “rapidly growing economies” need to realize that, in the global economy of the 21st century, their interests are tied inextricably to the staid old industrial countries. In the evocative words of Ben Franklin: “We must all hang together, or assuredly we shall all hang separately.”
The US to further lose global economic leadership to Eurasia. - DC
Chinese trade with Europe revolutionised by Railway freight transport
http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/01/28/cnrail128.xml
Chinese trade with Europe is about to be revolutionised by the rebirth of the old overland silk route - this time via rail.
An alliance of rail operators from the Pacific to the Baltic have just completed a trial run, moving cargo from China to the EU in just 15 days - under half the time it takes to ship containers.
The first train, carrying electrical goods, clothes and ceramics from Beijing, arrived in Hamburg late last week, five days ahead of schedule.
The new 6,000-mile silk route crosses China, Mongolia, Russia, Belarus, Poland and Germany and tackles several different track gauges.
“Barring any complications, a scheduled container train should be shuttling between China and Germany in a year’s time.”
Chinese Railways appears to be betting that it will quickly become a major trade route. It is investing in 18 new railway container terminals to be built over the next five years.
How do you reconcile TRILLIONS ? 2 TRILLION here 4 TRILLION there, several TRILLION in limbo.
How many billions does it take to move the U.S. dollar even 1 cent? These are the questions that make it a structural problem not cyclical. That is why China and the world are financing a black hole and they are nervous about it.
“and by that I mean that the US should export more, save more and rely less on Asian central banks and sovereign funds for financing - hasn’t really begun. ”
I agree with you. U.S has its own comparative advantage in trade. While China supports U.S with low end comsumer goods, U.S can sell China high end capital goods and technology. Then, there will be much lower deficit and more healthy relationship. It is not one side’s responsibility if the other side does not want to sell its goods.
ricardo-smith-keynes.
I agree with you. And throw in the risk that china’s investment boom collapses for reasons of its own, leading Chinese demand to fall even absent policy tightening. indeed, china might adopt stimulative policies, but not strong enough ones to offset a sharp fall in investment. That isn’t the risk now, but it strikes me a potential future risk.
Right now the risk is as you describe it — stimulus in the deficit countries but tightening in the surplus countries — and i would add the risk that some surplus countries might resist XR appreciation in the event of a global slowdown.
i would be very interested in comments on the graphs showing both net capital flows and the current account data in the later half of the post. Are they useful? interesting?
US Dollar Hegemony’s Golden Era is Ending, Warns Soros
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/23/bcndollar123.xml
Mr Soros also warned that the dollar’s status as the world’s reserve currency was drawing to an end, thanks in part to the financial crisis on Wall Street. He said the plight of US households, who are facing major slumps in nationwide house prices for the first time in living memory, was increasing the distaste among international investors for the greenback.
He said: “The current crisis is not only the bust that follows the housing boom, it’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. Now the rest of the world is increasingly unwilling to accumulate dollars.”
graphs are very informative
suggest an additional label for ‘net oil imports’ (’net US oil imports’?)
interesting lack of correlation between Japan and yen carry flows; tough to track this down
A trade balance between China and US surely seems like a realistic scenario, in the not too distant future. A generous shift of the RMB peg, or de-pegging would eventually bring about some kind of balance, I think. At least in theory.
What I find more difficult to picture is a trade balance between the big oil exporters and the US, or for that matter Europe and the rest of the big energy importers. I mean, there just has to be a limit to how many Cadillac and Mercedes one sheik will want in his garage. If oil stays at $90, or maybe even higher, how are they going to balance anything out? OK, so they buy General Motors and a few banks, but then what?
If you, on the other hand, imagine that the middle east were a part of the US economy, things begin to make sense again. I mean, they export in USD and you can argue that they are an integral part of the “USD economy” in one way or another. The typical sheik has long enjoyed the status of the super rich in America, being on first name terms with both George and Dubaya. They are part of an elite, which I cannot easily picture any Chinese joining very soon.
Neither president Bush, Congress nor the Federal Reserve is charting a course to a long-lasting economic recovery.
America’s “housing-bubble” recession has hit hardest precisely where the bubble has been most frothy. In Arizona, California, Florida and Nevada, housing prices have dropped precipitously, foreclosures are off the charts, and credit is gridlocked.
The U.S. Federal Reserve is most to blame for the housing bubble. After 9/11, Alan Greenspan’s Fed over-reacted with an ultra-easy monetary policy. Greenspan’s printing press artificially depressed mortgage rates and ignited a speculative housing boom. As prices spiraled upward, unscrupulous real-estate appraisers qualified lenders at whatever prices necessary, and mortgage lenders happily bought into the charade. Now, this bubble had to burst.
Though seemingly hard-hearted, the best “cure” for the housing bubble recession is to do nothing. A massive bailout will only maintain home prices at levels far above that which the market might otherwise bear — and above that which many people can afford. Any bailout would also fuel future asset bubbles because of the lack of “moral hazard”: Speculators will believe that the government will always bail them out and assume undue risk.
The good news about the housing-bubble recession is that it is short run — a necessary cleansing agent for an era of irresponsible speculation. That why no massive bailout or yet another round of the Fed’s ultra-easy money is warranted. Regrettably, in an election year, Washington is not getting this message.
U.S. sees Russia, China, Arab financial threat
http://www.guardian.co.uk/feedarticle?id=7283482
WASHINGTON, Feb 5 (Reuters) - The United States is worried that Russia, China and OPEC oil-producing countries could use their growing financial clout to advance political goals, the top U.S. spy chief told Congress on Tuesday.
Such economic matters joined terrorism, nuclear proliferation and computer-network vulnerabilities as top U.S. security threats described by National Director of Intelligence Michael McConnell in an annual assessment.
McConnell said U.S. intelligence agencies had “concerns about the financial capabilities of Russia, China and OPEC countries and the potential use of their market access to exert financial leverage to political ends.”
Guest — re lack of correlation with Japan and carry, look at the graphs on bank flows in the new BIS article on how to use the BIS banking data. my assumption is that the buildup of japanese claims on the caribbean and the buildup of caribbean claims on the us is carry related. the absence of recorded Japan to the US flows after the end of BoJ/ MoF intervention is otherwise a puzzle.
Is the concept of “adjustment” really useful in this context?
Presumably “adjustment” means that these trends will reverse at some point and return to some kind of condition which is “normal.” If there is some politically realistic scenario under which this happens, I would love to hear it. I have my own politically unrealistic scenarios, but I’m afraid these are quite inexpensive. And if it is not realistic to expect a spontaneous remission, why are we using a word that implies it has to happen?
I think that what no one wants to admit is that (a) these trends are the result of substantive structural differences between Western and Asian governments, (b) the relationship between the trend and the difference is a self-reinforcing feedback loop, and (c) the entire Western system of government is part of this feedback loop. Remember back in the ’90s when people were talking about the “Asian model?” I suspect we might start hearing that old tune again.
The fraction of Western society that devotes its efforts to producing useful goods and services is rapidly shrinking. And this is most noticeable among its social and intellectual elites, who for understandable reasons tend to be the same people. If you graph the ratio of Alinskyite activists to engineers and physical scientists in any Western country, it has soared over the last 50 years. And talent sinks like NASA made building consumer products terribly infra dig even among engineers. What did we expect the result of this to be? How else would it show up on the curves above? Perhaps we could load some of our NGOs, foundations and universities into those empty containers we send back to China? They’re certainly flourishing.
The other day I got a departmental magazine from my old undergraduate CS department. It had profiles of some of the current professors’ research projects, many of which were quite unintentionally hilarious. The funniest one was a young cryptographer who is researching the critical issue of how to implement authentication without identification - that is, how to define a digital signature without a digital identity. If this is all gobbledegook to you, imagine she was a pastry chef and her goal was to invent a recipe for Baked Alaska that contained no ice-cream and didn’t need to be baked.
And her research is certainly in the 98th percentile of usefulness of everything coming out of the university system. ‘Nuff said. I’m afraid the Western productive sector needs more than a fiscal policy makeover.
So what the curves above indicate is a declining Western productive sector. Western governments have been concealing this condition, which is so reminiscent of the Soviet Union’s, by monetary policy whose goal is to stimulate demand. By pegging their currencies to the dollar and “returning the marbles,” resulting in an overvaluation of the dollar relative to an alternate reality in which they did not practice Rueffian reserve accumulation, the BWII partners contribute to this sad case of degenerative monetary addiction.
When I hear the word “adjustment,” what I hear is “I’ll taper off.” I’m afraid it is well past that point. What the Western financial system needs is not moderation, but detox. I am starting to think that eliminating the trade deficit by force majeure - eg, a system of import and export certificates, a design that is well-known, low-complexity, neutral between interest groups, and trivial to apply for any nation with a working customs service - might be the kind of policy required.
Brad, would you mind passing on a question to Nouriel?
He says there won’t be any decoupling between the US economy and the world economy. But in a recession, we know that the economies of different states perform very differently. Southern California and New England suffered Depression-like conditions in the 1990/1 recession, but much of the country felt little or no effect.
Isn’t it more correct to say that even if there isn’t true decoupling between economies of different countries, there’s also very incomplete coupling? Maybe it’s more style than substance, but I think that Nouriel tends to oversimplify. To my mind that detracts from the investment implications.
The US current account deficit is a meaningful and even alarming percentage of US GDP. Yet somehow the investment income component remains negligible. At a rudimentary quantitative level, isn’t this the key to deferring “adjustment” so far? Even with data questions, this aspect remains a conundrum. How can the US continue to borrow and borrow and yet not pay for it on a net basis?
Maybe the international balance will reach a breaking point similar to what’s happened in the credit markets. Or maybe the credit markets will create the adjustment that is required.
Nice charts, Brad.
Those who think that exchange rates do not matter to balances of payments probably also think that customers visit Wal-Mart for the ambiance or the customer greeters.
Brad, you are so right on this one that it is not even worth debating. As long as an non-equilibrium condition carries on, one can always justify why it will last for ever - remember housing or the credit markets one year ago? The problem is that some changes cannot happen gradually and painlessly or follow predicable paths.
pictures on pages 2 & 4 may add perspective:
http://www.blackswantrading.com/files/99369f29c527913/bsccc020608.pdf
I would say the mean view on the trade deficit/ trade surplus expressed in the WSJ/ NYT/ FT is that it is caused by something other than the exchange rate, and thus efforts to put pressure on countries holding their exchange rates down are misguided (if not protectionists). i rarely see anyone arguing that China’s undervalued exchange rate is a form of protection for its import-competing sectors either, even tho now there is decent evidence that there has been a lot of imports substitution.
maybe exchange rates (realtively prices) matter is considered trite, but it is a view that isn’t often aired.
p.s. DC — I made the Japan chart just for you, to show that there was an adjustment in the late 80s after then yen appreciated. there certainly was an adjustment with respect to europe then, and there is again one now.
Your final chart nicely sums up the world situation right now, but I think the adjustment to the oil-world and Europe are mutually exclusive so long as high energy prices do not significantly tamper demand. As a weak dollar reduces America’s deficit with Europe by causing it to look internally rather than to the EU, it will increase the deficit to oil-producing nations because the price will appear to go up from a US perspective, but without any immediate alternatives.
Mr. Setser,
I feel like you’ve gone to a lot of effort to tell us something we already know. Container rates change almost instantaneously with changes in Fx.
I can’t produce charts as nice as yours to show that. At a time when containers moving from HK to LA = ± US$1800, containers moving from east coast to HK = ±US$350.
Jin suggests adjustment via returning high end capital goods and technology. Moldbug suggests adjustment via NGO foundations and universities.
So, here’s the plan! Next time we uncover one of those containers full of illegal immigrants we return it full of east coast MBA’s.
- jd -
Those people who argue, that exchange rates do not matter, would have to explain, why then so many countries are pegging there currencies.
I think you are the most important data analyst of this material out there. But you would have more influence if you did more analysis, projections, and recommendations. E.g. Roubini’s influence has gone up because his projections have been spot on. So, how do you see this unwinding / unraveling?
“I made the Japan chart just for you, to show that there was an adjustment in the late 80s after then yen appreciated. there certainly was an adjustment with respect to europe then, and there is again one now.”
Since the engineering salary wage differential between US and the China is 10-1, an adjustment on the order of a depreciation of 90% of the value of the US Dollar versus the Chinese yuan would be required to close the gap. Sure currency values do matter, but the recent 10% revaluation of the yuan hasn’t made any difference; another 10% yuan revaluation over the coming year also won’t make any difference. The US blew its comparative industrial advantage over the past 2 decades by massively misallocating capital into a non-productive asset bubble in Housing. The Bernanke-Greenspan Federal Reserve should be held fully responsible for the economic fiasco and gross mismanagement.
The US Treasury and IMF cronies threaten China over its SWF, but isn’t China’s SWF their money. Where is it written in the United Nations charter that every other sovereign nation in the world must follow the dictates of the Washington Consensus? LOL - DC
US Treasury warns China over sovereign wealth fund
http://www.sinodaily.com/2006/080207171512.289lmnra.html
The US Treasury cautioned China Thursday against using profits derived from its newly launched, cash-flush investment fund to delay reform of the yuan currency.
Several bills have been proposed in the US Congress threatening China with sanctions if Beijing did not allow greater currency flexibility.
The United States has asked China to participate in the drafting of voluntary international “best practices” for sovereign wealth funds that was being coordinated by the International Monetary Fund.
“There’s a certain irony in the way that private equity and hedge fund investors, usually from outside Asia, are providing the capital to many companies within Asia, despite the huge pools of capital sloshing around the region…” http://ftalphaville.ft.com/blog/2008/02/07/10772/insight-how-to-develop-asian-domestic-bond-markets/
DC: The US Treasury and IMF cronies threaten China over its SWF, but isn’t China’s SWF their money.
You have to be careful about newspaper articles since they often get it wrong. I don’t think anyone is threatening anyone over anything. Also the CESRC is a nest of China hawks that most people don’t take very seriously. Personally, I don’t mind them too much. Having them write reports that no one reads keeps them from doing anything really dangerous.
Two little questions:
Anticipating heavy Chinese investment via London or other more discreet channels, for Q3+4 2007 as you suggest, but doesn’t the sharp increase in their reserve growth indicate that they must be buying fewer US assets? One goes up sharply as the other drops…
The net European investment tends to hit zero with annual regularity (end of year) and leap up in between. Is there a practical explanation for this pattern?
Twofish,
It is very clear that China’s economic boom has become an emotional issue to alot of people in Washington. Emotion usually leads to people making illogical decisions. But I seriously doubt the US Treasury and IMF can do anything about it as many of these Western companies and developing nation governments need the investment badly and the Chinese, Russians, and Arabs have the most cash today.
Off-Topic:
Record Cold Winter mimimal impact on China’s Booming Economy
http://www.atimes.com/atimes/China_Business/JB08Cb01.html
SHANGHAI - The worst snowstorms in 50 years that devastated central and east China before the Spring Festival or lunar new year may have slowed the country’s economic growth sufficiently for the government to ease macroeconomic controls targeting overheating, argue some analysts.
Gross domestic product (GDP) growth for January is forecast to be slower due to seasonal factors and the effect of the snowstorms. The World Bank has adjusted its projection for China’s 2008 GDP growth down to 9.6% from 10.8%. It changed its outlook for inflation up to 4.6% from 3.8%.
The National Development and Reform Commission, which oversees economic and industry policies, has concluded that the snowstorms will not have any significant impact on the fundamentals of the economy.
Already, as a semblance of normality returns, Beijing is allocating funds for reconstruction plans. The cash will go on infrastructure such as roads, railways and the power grid. Plants will resume production and coal mining will pick up. Rural migrant workers will return to coastal export-oriented factories. The economic engine of China will soon be roaring again.
“Several bills have been proposed in the US Congress threatening China with sanctions if Beijing did not allow greater currency flexibility.”
Yeah sure. Lotsa luck.
(I had to pick myself up of the floor to write that comment since I fell down laughing when I read the news item).
DC: Where is it written in the United Nations charter that every other sovereign nation in the world must follow the dictates of the Washington Consensus? LOL -
Where is it written in the United Nations charter that the US cannot regulate investments in its own markets and has to sell its assets to other nations under any conditions?
I find the US attitude is clear and rational: they want the Chinese to stop selling them their poison, but not so fast that the addiction would kill them - and not in such ways that would affect their equity markets.
Pallj –
strong Chinese reserve growth usually means more not less dollar purchases. the recent slowdown in reserve growth seems to stem from an increase in the fx held by the banks, which would suggest ongoing dollar purchases. the cic’s mandates for external fund managers seem bit EM heavy/ Dollar light, so that might imply lower $ flows. but right now, more chinese equity investment in asian EMS would just lead to faster reserve growth there.
anonymous — well, my only really accurate prediction over the past couple of years has been to avoid being long the dollar. I had that view in 05, when it wasn’t terribly popular. and more recently i have indicated that the $’s move v the euro is large enough that the scope for further moves seems more limited, while the $’s adjustment v. the emerging world has only started. My views on the GCC currencies are also not exactly a secret.
Before Nouriel was right he was at least partially wrong, including in a paper that I co-wrote with him back in 2005. Our forecast that Bretton woods 2 would unravel by the end of 2008 (and certainly by the end of 2010) doesn’t look so good –
the us consumers willingness to spend (and the steady upward march of housing) looks to have come to an end before central bank financing of the US dried up. that has made me a bit reluctant to try making big bold forecasts. my track record is so/ so.
the one forecast i have made is that some i-bank projections for SWF growth look a little high to me. but that is probably not the kind of forecast you are looking for …
This is an excellent post. One aspect that shows up clearly is the relatively constant deficit with Japan. During the U.S. boom years up to 2000, the deficit was part of the U.S. general tendency to draw in foreign resources to satisfy excess domestic demand. From 2000 to 2004, it was kept up by Japan’s official intervention in exchange markets, mostly supporting the U.S. dollar. (Why didn’t the Bush Administration object? Recall that Koizumi put 300 Japanese troops in Iraq, despite overwhelming sentiment against such a move within Japan.) After 2004, the carry trade moved funds out from low-interest Japan, so currency intervention was no longer necessary to maintain Japan’s trade surplus. However, when the stock adjustment from that movement ends, we may once again see Japan’s central bank engaging in currency intervention. If U.S. demand fails, and China and Japan continue to show reluctance to share in the needed adjustments, we may see an unfortunate re-emergence of trade-protectionist pressures within the United States.
Don — thanks.
I would put a bit more emphasis on the adjustment that we did see in Japan in the late 80s — japan’s bilateral surplus with the uS fell from 1.0% of US GDP to 0.5% of US GDP — than you do. but overall, there is little doubt that Japan’s bilateral surplus with the US hasn’t moved around in the way say europe’s surplus has.
@David Chang,
“Since the engineering salary wage differential between US and the China is 10-1, an adjustment on the order of a depreciation of 90% of the value of the US Dollar versus the Chinese yuan would be required to close the gap.”
That is wrong! The engineering salary wage differential is way smaller than 10-1. Furthermore it is not said that the average engineering output in China is equivalant to the US. I believe it is about half as high (saying that out of experience!).
A depreciation of 30% should do the trick!
forget it affg, Dave chiang seems to be unable to grasp what labor productivity means and unable to understand while the chinese policy is suicidal for its own country…
I bet all we have to do is wait till he sees tens of millions of unemployed chinese workers trying to make their way back in main land, looking desesperatly for ways to get food and shelter, after having lost their jobs and their homes …
And the rebellions against the party will be huge too…
Now that the debt party is over it s just a matter of months till china growth turns negative. 18 to the max. I d say.