Brad Setser

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The 2007 US current account data

by Brad Setser
March 27, 2008

The US recently released its current account data for the fourth quarter. Among other things, the data showed another $150b in official inflows in q4, bring the total for 2007 up to around $400b. In both q1 and q4, official inflows awere almost as large as the US current account deficit. Official flows in q2 and q3 were smaller.

The official flows data – I suspect – will be revised up, both to reflect the 2007 survey and eventually the 2008 survey. Sovereign funds and central banks likely combined to add about $1400b to their assets in 2007. I doubt only $400b was invested in US assets. A growing sum is likely managed by private fund managers and thus not registering in the US data. The $50b increase in official holdings of Treasuries in the 2007 data looks awfully low to me, not the least because the Fed’s custodial holdings of Treasuries for foreign central banks increased by $70b.

I’ll take credit for arguing (or perhaps insisting) that the US data understates official inflows – and for arguing that the official sector’s already large purchases of US debt would likely have to increase during a US slump to avoid a dollar right. The argument that dollar depreciation was a necessary part of the process that would bring the US deficit down also seems broadly right.

But I also got one big part of the US current account wrong.

Back in 2006 I predicted that the income balance would deteriorate quite significantly in 2007. My logic was pretty simple: the average interest rate that the US was paying on its (mostly dollar-denominated) external debt was well below the average interest rate the US paid on its (mostly dollar-denominated) external lending. I expected the US borrowing rate would rise faster than the lending rate, and that – together with the ongoing rise in US external borrowing – would drive a significant deterioration in the US income balance.

That has not happened. The income balance actually improved in 2007. Richard Iley (see our debate in late 2006) was right. Consider the following graph. I expected the gap between a line plotting the US current account deficit (as a share of US GDP) and the line plotting the US trade deficit (goods and services) to get bigger. It didn’t.*


* The data here is the quarterly current account balance (seasonally adjusted) as a share of quarterly GDP (also seasonally adjusted). The sign has been inverted so a deficit is positive and a surplus is negative. That way a rise in the trade deficit is indicated by a rise in the line labeled trade balance.

Much more follows

I also expected the income balance to turn negative (or – in the graph above, positive; I have inverted the sign so a bigger deficit is represented by a bigger number). It didn’t. It actually improved quite substantially.

Both the income balance and the trade balance are worth unpacking a bit more. Both are the gap between two big numbers. The trade balance is the gap between imports and exports. The income balance is the gap between what the US pays on its external borrowing (and direct investment in the US) and what the US gets on its external lending and investment abroad.


Let’s start with the trade balance. It has improved both because (non-oil) import growth has slowed and because export growth has remained strong. A plot that adds residential investment and non-oil imports to imports and exports is illustrative.


As residential investment has fallen, the pace of growth of non-oil imports has slowed.

Weakness in the US consequently is the main explanation for the slowdown in imports. But the steady rise in exports v GDP though cannot be explained by the fall in US residential investment – and slower US demand growth. The slide in exports (v GDP) started in 1997 – not coincidentally when the dollar started to strengthen. The rise exports to GDP started in late 2003, just after the dollar started to depreciate.

A plot that disaggregates the trade deficit into a petroleum and a non-petroleum deficit tells the story well. The non-petroleum deficit is coming down quickly. The petroleum deficit not so much.


What of the income balance. It too can be decomposed into the balance on FDI and interest (for simplicity, I have not tried to pull dividend payments on portfolio holdings out of the non-FDI data. These payments are small and we don’t yet have 2007 data, so this is not a major source of error)


Four things jump out:

First, FDI receipts are much larger than FDI payments. It you plot the implied rate of return on US investment abroad v the implied return on FDI in the US, this stems from the very low reported return on foreign investment in the US. Almost all of the difference reflects different reported rates of reinvested earnings, not actual cash payments. I still that reflects tax arbitrage more than anything else – foreign FDI hasn’t consistently produced lower returns than holding treasuries, as the US data implies.

Two, directionally, though the FDI balance has improved a lot both because of stronger US returns abroad and weak foreign returns in the US. The sharp fall in FDI payments on direct investment in the US suggests the US is in recession.

Three, interest payments have increased sharply – rising to around 4% of US GDP. But so too have interest receipts. That reflects the growth in both US borrowing and lending – whether from true financial globalization or the growing use of London and other offshore financial centers by the “shadow banking system.” Carlyle Capital (which recently failed) used a London entity to borrow dollars to buy US mortgage backed securities.

Four, the increase in both interest payments and receipts has stopped and is now heading down. Most US lending and borrowing is denominated in dollars and fairly short-term. The fall consequently reflects the fall in US rates.

A plot of net FDI payments v net interest payments (the difference between the redish lines representing FDI income and bluish lines representing interest payments and receipts above) can help us understand the improvement in the income balance


The net balance on FDI improved sharply – mostly because of the fall in payments on FDI in the US. And – -more surprisingly – at least to me, the income balance stopped deteriorating. It actually got better over the course of 2007. Falling rates helped. But there is a bit more going as well. I had expected in late 2006 the interest rate on US borrowing abroad to rise relative to the interest rate on US lending as long-term rates caught up with rising short-term rates. Historically the US pays more on its borrowing than it gets on its lending (likely because of the term premium). The opposite though happened.

The implied interest rate on US lending was 0.35% more than the implied rate on US borrowing in 2006 – and 0.55% in 07. I had expected that gap to disappear. That is the main source of error in my earlier current account forecast.

To use the words of Hausmann and Sturzenegger, US dark matter grew really fast. That rise though reflects US weakness – falling rates, both short and long-term and falling FDI payments – not US strength. So it isn’t totally consistent with the dark matter story.

The fact that the US borrowing rate is so low – it was 4.65% in 2007 by my estimates – and remains lower than the US lending rate (5.2% by my estimate) is one of the great puzzles of the US data. Big borrowers with depreciating currencies usually have to pay a premium. The US is still borrowing at a discount. Its emerging market central bank creditors have been very kind. They are eating big currency losses without getting compensated with high interest rates.

There is more to tease out of the 2007 data, particularly the financial flows data. Financial globalization came to stop in q3 and q4. Inflows and outflows were both well below their q1 and q2 levels. I think this reflects the collapse of the (largely offshore) shadow banking system. And it will be interesting to compare official inflows to the growth in dollar reserves implied by the COFER data. But these are topics for another post.


  • Posted by RealThink

    From my viewpoint, the US trade deficit will be substantially reduced over the coming years through a phenomenon that began at the end of 2006: the price rise of agricultural commodities, of which the US is a big exporter. That price rise is to a great extent the effect of rising energy prices thru the food-biofuel arbitraging mechanism. It is quite likely that turning an ever greater share of US corn to ethanol (and then soybeans to biodiesel) will cause in a few years the halving of US agricultural exports in volume and their doubling in dollars (i.e. quadrupling agricultural prices). That will substantially reduce the US current account deficit and give the US a significant strategic advantage.

    The US has certainly the right to follow that path. But they also have the duty to tell the world openly that they will do it. Like: “Along the coming years and decades our food exports will become progressively lower in volume, and the same will probably happen to total world food production. It is conceivable that they could be half their current volume in 10 years. People, and particularly poor people, should have it in mind when making procreation decisions.”

    Dropping a nuke on a city is not genocide if its dwellers are given a week’s notice.

  • Posted by DC,9171,1725094,00.html
    The Bush Administration has attempted to pin the blame for the trade deficit on “unfair” practices by foreign countries. Special abuse was reserved for China. Bush has maintained that Beijing’s manipulation of its currency, the yuan, made Chinese-produced goods exceptionally cheap and as a result they have flooded the U.S. market.

    This argument is nonsense and always has been. Since China ended its currency peg in mid-2005, the yuan has risen 17% against the dollar and hit an all-time high last week. But the trade deficit with China hasn’t budged. The real cause of the trade deficit is that Americans spend too much and save too little. That’s true for both the government, with its mammoth budget deficits, and the average consumer. American household debt reached $13.8 trillion at the end of 2007, or more than double the amount in 1999. This debt-financed consumption has led to a level of imports well beyond the nation’s ability to pay for them. Americans have no one to blame but themselves.

    The dollar has hit record lows against the euro, and last week sank to its weakest level versus the yen since the mid-1990s. That means all of those imports that Americans buy – from oil to toys – are becoming increasingly expensive, eroding the average American’s quality of life. “By pursuing a policy of diminishing the dollar,” says Thailand-based investment analyst Marc Faber, Americans “impoverished themselves relative to the rest of the world.”

  • Posted by Guest

    I thought DC was a Chinese,

    I’ve been told that Chinese immigrants don’t integrate in the new homeland in lots of generations (in fact I tried hard to find a bus terminal in Chinatown NY with little success and lots of smiles), but now DC is pity of US citizens…

    He’s integrated economically and blog-ly, at least (how many generations after)?

    Who knows!

    PS: Excuse me, Brad, but I love his hate of Citi’s honcho Roubin and lady Clinton. And I’m not alone.

  • Posted by bsetser

    i was hoping for a somewhat more serious discussion of the issues raised in the post; to my mind, the argument that the dollar’s value has no impact on the trade deficit isn’t credible. the periods of extreme weakness in exports (v GDP) correspond with a very strong dollar (early 80s and late 90s/ first part of the 00s). also note the strong recent improvement in the non-oil balance …

  • Posted by Guest

    Now that the confirmation is The 2:

    Here goes impact between pounds and €uros, and auctions:

    Sorry, Brad, but a bit humour…

    Nuclear energy… Chenese O.Games… another year of GW Bush…

    Smile a bit!!!

  • Posted by euro

    If you want a Top Model short comment, here it goes:

    Good evening!

  • Posted by don

    I would like to see a more global view of current account balances, with perhaps five groups – major oil exporters, the United States, other developed economies, Asian economies, and all others. The yen is still too cheap and the yuan is extremely cheap, but the euro and pound are much overvalued. If we hope to see U.S. deficits fall further, where might they grow, or will present surpluses have to fall?
    If my casual impressions are correct, Asian surpluses are still growing (albeit at slower rates), even in the face of growing surpluses from oil exporting countries. U.S. deficits have stopped growing, but where are the differences being made up? Who will absorb any further improvements?
    I agree with RealThink that U.S. agriculture could be a venue for substantial improvement in the U.S. trade balance, and perhaps in the not-too-distant future put the dollar on a strong path of secular appreciation. It may even allow us to repay the huge debt we are building, which continues to grow even as domestic demand is slowing and the economy enters a recession.
    It appears that lower interest rates are overcoming the effect of larger debts to reduce total interest payments, at least for now. I wouldn’t worry that foreign central banks will need higher rates for the U.S. to attract their investments – they are not investing for profit on their reserves, but as a means to gain industry at the expense of importing countries. Do you think it would be smart for them to shift to the euro or the pound, given current levels of these currencies? Perhaps they are buying and storing oil. But as Japan’s officials commented when similar issues were raised about their massive foreign reserves, “Who says our main purpose is to turn a profit on our reserves?”

  • Posted by Richard Kline

    Yo Brad,

    Regarding the sticky low offshore borrowing rates for US debtors relative to onshore rates which you mention:

    —How much of this do you see as a result of the yen carry trade?

    —How much of this do you see as a result of low bid lending in China or related regions (your principal brief)? If there is such discount lending, do you see it as an attempt to brake yuan appreciation, or attributable to some other action?

    I have no strong opinions on these question, but I’m interested in your perspective since you are in a good position to have an informed perspective.

  • Posted by NICOLAS

    It is interesting to note the words Dark Matter within this discussion. Dark Matter is a good description of A) government statistics. B)administration agenda C) Federal Reserve agenda
    The trade deficit will be reduced by the reduction in consumption levels. The exports are fine for a handful of industries especially producers of armament and the con game is over with real estate.

  • Posted by df

    nothing to add, of course currencies have an impact on deficits. Dave is pathetic. I mean the US saving rate will rise. No doubt. So will the european saving rate. By then though the global economy will cry (or worse be silent).
    So far data proves the deficit between china and US is stabilising it ll soon be improving. However the european deficit with China is getting worse. For obvious reasons.

    In the times ahead all economies will lose. No doubt about that. And all economies bear huge responsabilities in the global debt bubble presently exploding. So no need to blame others.

    The only question is : Do we debase all currencies, erase 50% of all debt, regulate finance very strongly and restart anew ?

    Or do we play non cooperative games, competitive devaluations, tariffs, and ultimately wars …
    Thus allowing the same game to be replaid 100 years from now, with a by then even bigger global debt bubble.

    Are not you tired of this ?

  • Posted by Anonymous

    “Almost all of the difference reflects different reported rates of reinvested earnings, not actual cash payments. I still that reflects tax arbitrage more than anything else – foreign FDI hasn’t consistently produced lower returns than holding treasuries, as the US data implies.”

    So foreigners are reporting lower retained earnings? Do you think they bury the difference through inflated transfer pricing of internally passed costs? If so, would this not show up otherwise as part of the trade deficit?

    Remarkable how the income balance keeps defying gravity. How is the net foreign liability position trending these days?

  • Posted by bsetser

    Anonymous — it probably is mix of transfer pricing to show more profits in low tax jurisdictions (which inflates the trade deficit) and simple under-reporting.

    Richard Kline — I don’t think much of it reflects the carry trade, and most US liabilities still seem to be denominated in dollars not yen. But that is a guess.

  • Posted by Anonymous

    “…Comparing the current exchange rate with the 100 yen per dollar in 1995 is misleading because of differences in US and Japanese inflation… Despite the recent dollar decline, America’s trading partners still have large trade surpluses. Japan’s trade surplus exceeds $100bn. In the eurozone it is nearly $40bn, in China it is $250bn, in Russia it is $140bn and in Saudi Arabia it exceeds $140bn. So the more competitive dollar is not causing fundamental trade problems for America’s trading partners… A lower dollar has the favourable effect of stimulating US net exports and therefore of raising the US growth rate at a time of general economic weakness. In contrast, higher interest rates would reduce aggregate investment and other aspects of aggregate demand…”

  • Posted by Anonymous

    “…One almost inevitable consequence of the wild and accelerating monetary expansion we have witnessed in the past few years is a tendency for bank loan portfolios to become increasingly risky, and I am more worried than ever that a sharp slowdown will cause a surge in non-performing loans…”

  • Posted by Dave Chiang

    Who’s fault are the global economic imbalances? Ask the Bundesbank, Germany’s central bank about “Bubbles” Greenspan and Bernanke. – DC,1518,druck-543588,00.html

    Like a dangerous virus, the crisis in the US real estate market has infected large parts of the worldwide financial system. Roubini, a professor of economics at New York University, has warned of the risks of a “core meltdown” of global financial systems and has summarized his thoughts in an analysis entitled “The Twelve Steps to Financial Disaster.” According to an assessment by the International Monetary Fund, the crisis could lead to global losses exceeding $800 billion (€520 billion).

    The American economy is presumably already in a recession, which affects the rest of the world. Experts also predict noticeably less growth and fewer new jobs for Germany. In this situation, even the most zealous disciples of the free market are calling for more government intervention. “I no longer have faith in the ability of the markets to heal themselves,” Deutsche Bank CEO Josef Ackermann confessed in a speech delivered last Monday in Frankfurt. Ackermann said that the American example shows that governments and central banks must now play a stronger role.

    Even worse, because the US Federal Reserve, fearing a nationwide bank crash, is flooding the markets with cheap money, the dollar has plunged to a new record low, with bitter consequences for German producers. The plunge of the US currency has already shaken the core of German industry: machine building, aviation and automobile manufacturing. Together these industries employ more than a million people and play a key role in preserving Germany’s status as the world’s largest exporter of goods.

  • Posted by df

    DC : blablabla

    The ECB should be lowering rates, printing cash, restricting capital flows and regulating the finance industry.

    blame on the USA is useless. The bubble is over now. And it has happened everywhere with every single institution accomplice in this global grime (including of course China).
    The only question is : what do we do now ?

  • Posted by Dave Chiang


    China isn’t an accomplice, but a victim of the global US Dollar hegemony scam. For the past decade, the Wall Street banksters have enjoyed the closest thing to an economic “free lunch” – real economic wealth exported from Asia in exchange for fiat US Dollars printed in almost unlimited quantity by the Greenspan Fed. Despite the endless carping about Tibet on CNN which has been a part of China for past 500 years, the Chinese have done a lot less global damage than Ivy League types working in the Washington or Wall Street with truly insane ideas, such as going to war with Iraq, or attacking Iran, bombing Yugoslavia, or deploying US Aircraft carriers in the Taiwan straits at point blank range of Chinese anti-ship missile launchers and submarines.

  • Posted by Emmanuel

    RE: The positive income balance –

    (1) The recording of retained earnings is still as much a mystery now as it was then. It would actually make for a very interesting academic paper to see how much income is declared by MNCs in low tax locations as opposed to higher tax jurisdictions. The advocacy group Tax Justice Network does some research in this area but the data are incomplete for understandable reasons;

    (2) With B-B-B-Bennie of the Feds cutting rates Stateside faster than anyone else in the industrialized world, it is no surprise to anyone that interest payments by Uncle Sam will decline faster relative to what he receives from elsewhere given that demand for Treasuries is remarkably inelastic. Plus, a weakening dollar only turbocharges returns from elsewhere in $ terms.

  • Posted by cam

    Regarding the curious fact that FDI has a much higher return overseas than in the US, the big pharma companies charge the most for their drugs in the US, but are able to report their profits as accruing overseas:

    So I wonder just how much of every multinational’s non American income is ‘real’ and how much is really just an accounting manuever.

  • Posted by DC

    US Investor Capital diversifing overseas

    NEW YORK ( — Where are investors putting their money in these uncertain times? Apparently, more and more are seeking safer havens in Europe, India, China and Latin America.

    With recession fears dogging the U.S. markets, stocks had a dismal first quarter. But according to recent figures from two key research firms that track the mutual fund industry, investors are flocking to overseas markets.

    $4.4 billion, or nearly 60%, was invested in funds that mainly invest in non-U.S. stocks. What’s more, the latest TrimTabs data showed that investors pulled $6.9 billion from exchange-traded funds (ETFs) that invest in U.S. stocks. Meanwhile, ETFs that invest in stocks from outside the U.S. reported inflows of $831 million.

  • Posted by bsetser

    Emmanuel — most US lending abroad (see the detailed Treasury survey data and the details of the banking data) is in dollars, so cutting us dollar rates doesn’t obviously produce big gains for the US. That is apart from the gains that come from having more debt than assets, or borrowing more than you lend. There are gains from higher rates on euros than on $ (or real) but those seem sort of small.

    tho in practice those gains may also be understated by the use of offshore financial centers for various carry trades by us hedge funds.

    the big currency gains show up as capital gains that will likely produce a significant improvement in the us net int. inv. position in 07.

  • Posted by df

    Dave don’t have me cry…
    China has Huge reserves, and adds more. Why ? Because it wants to keep RMB low. It prefers relying on export rather than building a safety net for its population. It has had a commercial and balance of payment excedent for years and has done nothing to come back to equilibrium.
    Indeed it has done everything to increase it.

    SO CHinese authorities are accomplice in the present world debt bubble. They could stop buying US govt bonds and the USA would find it harder to fight in Iraq. AFter all the iraq war was funded with chinese and gulf money.

  • Posted by Dave Chiang


    Under the global US Dollar hegemony regime, the $1 trillion in US Dollar reserves held by the China PBoC are next to being worthless. Those US Dollars are devaluating in value by the hour. Those US Dollars can’t be spent in China for anything. The Chinese can’t just dump all of its US dollars. Not only would that be incredibly destabilizing to the global economy, but it also would be effectively impossible. The US dollar has been the reserve currency for decades and there are just too many of them out there to be converted into anything else. Bernanke in Congressional testimony even remarked that the Chinese Central Bank was stuck with rotting stacks of US dollars. Thanks Bernanke for being honest just only once.

  • Posted by Anonymous

    “…corporate giants such as Boeing, Haliburton, Morgan Stanley, Pepsi and Xerox have increased their subsidiaries in tax havens by several hundred or thousand percent in just five years… due to its economic system and lack of data, the seventh economy, China, is not subject to comparison in this regard…”

  • Posted by Guest

    “…the official sector’s already large purchases of US debt would likely have to increase during a US slump to avoid a dollar right.”

    What’s a dollar right? Or is this a typo?

  • Posted by Anonymous

    “JPMorgan Chase & Co., the world’s second-biggest custodian of assets, agreed to buy 200 billion euros… of investments from Stockholm-based Nordea Bank AB. As part of the deal, JPMorgan was appointed global custodian for Nordea Funds and Nordea Life & Pensions, the New York-based company said yesterday… JPMorgan will also set up branches in Denmark, Finland and Norway and add to outlets in Sweden…”

  • Posted by Anonymous

    CHICAGO and NEW YORK, March 14, 2008 – NYSE Euronext, the world’s leading and most liquid exchange group, and CME Group, the world’s largest and most diverse derivatives exchange, today announced that NYSE Euronext will purchase the CME Group’s Metals Complex. Trading of full and e-mini gold and silver futures and options on futures contracts will begin later this year…

  • Posted by livingston

    To some extent worrying about the trade deficit when US consumption is on the verge of contraction is very similar to Greenspan and the Fed still worrying about deflation in 2004-2005 and not doing anything about low rates. While the deficit is still high historically, the trend is unequivocally down….its just a matter of time. As consumption comes down, imports come down and as the economy contracts, petroleum volume and prices will come down. There is nothing that needs to be done from a policy standpoint; everything is already in place.

    I understand why everyone keeps pointing to the consumption profligacy of the US for virtually every financial problem in the world. To a large extent it is true. The bigger question, however, is that if a) consumption in the US and other developed markets go down and we become net savers in a big way — much the way Asians became exporters of capital after Asian crisis — and b) given the increase in new productive capacity in EM over the last few years, will the world be able to deal with the ensuing deflation. While every one may want teh US to save more and consume less, but when that happens, the rest of the world “may not be able to handle the truth”

  • Posted by Guest

    Since the US won’t do anything about the mess (it benefits too much from the status quo to change it), it will be up to China and other trade partners to take the steps necessary to stop the flood of US dollars into the world economy in exchange for goods of value. I would think that the main surplus nations would band together to hammer out a policy to stop the dollar influx. Why don’t they?

  • Posted by bsetser

    Guest —

    good ?

    I think the answer is:

    a) it would implying forcing the US to adopt more restrictive policies, which would help the world financially but might mean a stronger fall in global demand and lower chinese exports and world oil prices

    b) it would imply some willingness to change existing currency policies if the US didn’t change. if you peg to the dollar, you have to buy $ — and for big players, you have to lend a lot of those $ back to the uS otherwise you risk adding to pressure on the $.

  • Posted by bsetser

    Livingston — the trend on the non-oil deficit is down. the deficit including oil has been stable. and it isn’t clear to what extent the fall in the non-oil deficit is structural or cyclical (I suspect it is a bit of both).

  • Posted by df

    dave just stop arguing. China is financing the USA and their Iraq war. They are adding to their reserves all the time. They could let the RMB rise until their excedent disappear, yet they won t.
    So china is part and parcel of the present global mess.

  • Posted by Guest

    “Bernanke in Congressional testimony even remarked that the Chinese Central Bank was stuck with rotting stacks of US dollars.”
    Really? Maybe that’s why he thinks he needs to print more.
    You are exactly right.

  • Posted by Guest

    DF, leave alone DC. It’s a wall. It will come down sooner or later like Berlin wall. But he’s in a hard place: he’s a Chinese and an American, communist and capitalist… Sooner or later he’ll choose something in between, but in the meantime lets him fight to everybody.

    Livignston is right, and I like to hear from Brad something out of non-oil and with oil.

    I’m not an expert, but it seems that when BB lowers rates oil goes up, and Brad gets nervous.

    Because of speculative oil rising for low interest rates or viceversa (look in wikipedia or google)? Does it matter?

    Lot’s of noise with few results. Or not, Brad?

    Spend less and save more is the formula for USA,

    But the result? Will be good for anyone in the mess we are in?


  • Posted by Anonymous

    “…higher oil prices contribute to higher inflation, which in turn lowers the value of the dollar, which boosts oil prices, and so forth. In other words, the oil market is coming to resemble the gold market…”

    “…Gold… fell to as low as 926.40 usd as the US treasury looked likely to approve the sale of gold from the IMF…”

    sold to what/whom?

    “…In the past, hedge funds have typically restricted their involvement with commodities to speculation in the futures market… The ConAgra deal illustrates how some funds now seek a presence in the physical commodities markets in order to make more well-informed trades… “The combination of ownership and trading of commodity assets is very important and is a powerful business model.” Grain traders said Ospraie was expected to play a big role in trading grains in the cash market….”

    “Whatever the reason, the price for a bushel of grain set in the derivatives markets has been substantially higher than the simultaneous price in the cash market… What is not happening in these markets is equally mysterious. Normally, price disparities like these are quickly exploited by arbitrage traders who buy goods in the cheap market and sell them in the expensive one… but that is not happening here… “…they are leaving these profits alone? It just doesn’t make sense.”

  • Posted by Anonymous

    “…with greater access to their confidential information, the Federal Reserve can make sound decisions, Boston Fed President Eric Rosengren said… “It is too soon to call whether or not we are in a recession…”

    “The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system… Democratic lawmakers are all but certain to say the proposal does not go far enough in restricting the kinds of practices that caused [“the financial crisis”]. Many of the proposals, like those that would consolidate regulatory agencies, have nothing to do with the turmoil in financial markets. And some of the proposals could actually reduce regulation… The Treasury plan would let Fed officials examine the practices and even the internal bookkeeping of brokerage firms, hedge funds, commodity-trading exchanges and any other institution that might pose a risk to the overall financial system…”

  • Posted by DaveR

    Haven’t seen much discussion on the main point: Why is the Bank of the US still able to earn spread income given its rising relative indebtedness and presumably rising risk premiums? The most simple & benign answer could be that that despite the relative rise in indebtedness and related currency depreciation, the US is nonetheless still a genuinely less risky borrower on balance versus ROW. The most simple but not benign could be that despite the massive size of debt markets, the presence of impure capitalists (Foreign Official investors) are warping the global cost of capital by making one-way investments.

    One slightly more complex answer could be that that it has become extraordinarily difficult to measure US riskiness as separate from ROW given the the significance of the dollar as a store of savings and US consumption as a source of at least short-term stability in foreign economies, injecting potentially unusual considerations into risk premia. An extreme analogy could be if Freddie Mac notes traded below matched Treasury yields in the near future. Clearly the benign explanation (relatively worsening but still superior credit of FRE) above would not be on the table. But if there was a sort of consensus that the only way for the US to avoid calamity was to ensure that Freddie paper is money-good, you could imagine a legitimate situation where FRE paper was favored given the possibility that the US injures itself by trying to fix FRE and renders the FRE lenders relatively better off. Of course, the US would be FRE here and the ROW would be the US. Ridiculous thought?

    I would love to see an entry discussing your view of whether you can find any merit in the more benign explanation of worsening but yet genuinely favored US credit.

  • Posted by FG

    Livingston: …worrying about the trade deficit when US consumption is on the verge of contraction….

    Probably the problem could be solved by a fall in US import. That could only happen with a very severe recession however.
    One question is: would the US government let it happen without jumping in, borrowing huge sums and throwing it at the consumers until they do their jobs and… consume?
    I don’t think that would be very politically palatable.

  • Posted by Jack

    Guest (and Brad)

    I think the word “right” in the quote was supposed to be “rout” – but that’s just an educated guess.


  • Posted by Dave Chiang

    Is china under more foreign speculation pressure? $119 billion of USD extra hot money in January and February.

    That only means China will hold more fiat US Dollar toilet paper, which will make China more closely tied down with the impending economic collapse of the US Bubble Economy. As per Economist Robert Shiller, the US Housing Bubble is too large to bailout, an estimated $12 trillion in paper wealth will evaporate in the Housing Bubble implosion. There is no way out from this fiasco. Bernanke wouldn’t dare print that much fiat money.

  • Posted by Anonymous

    “General Electric Co. is divesting consumer-finance businesses in the U.K. and Germany and selling its U.S. corporate credit-card unit to concentrate on higher-margin areas and developing markets… “This is a thoughtful effort to really, aggressively look at where we make money, where we don’t and where we should have capital redeployed…”

  • Posted by livingston

    Brad — current account deficit down from 7% of GDP to 5% of GDP would construe as being down. In addition, it is all structural because this time around there is no difference between structural and cyclical. Due to high level of consumer debt, which is a strutural problem for the economy, in the current contraction overall rate of consumption as a percentage of GDP will do down back to the 60s from 72%. Therefore, in the current go around, the reduction in imports due to reduction in consumption would qualify as structural as it is not coming back even if the economy starts to grow back again. Probably not a very important point for the current discussion but worth noting. My key point in posting the response was that while every one is worried about inflation, they ought to worry about deflation. From the point of view of economic history, first the Japanese bubble flooded capital into Asia leading to the Asian crisis. Then the Asian crisis released deflationary pressures that was cushioned by the increase in debt financed consumption in the US, which came at the expense of US housing, consumer debt and now vulnerable currency. All of it probably aggravated by the policy mistakes of the Fed, in their efforts to singlehandedly save the world from deflation. When the current US crisis creates the same pressures — turning consumers into massive savers — there is no other economy large enough to pick up the slack. EM consumption, the only potential candidate, is going up but is way too small overall to sop up the increase in global production. Forgetting about financial markets for a second, the problem with the world right now is that investments have rocketed in the EM world and there is not enough consumption growth in those markets and in Japan. It causes massive amounts of flows in good and services, which then lead to massive amount of financial flows, which causes stresses. We are moving from one set of victims to another. First it was Asia as the victim. Now it is the US. Next it will be Europe with its expensive currency. While everyone in Europe is high fiving their currency and hoping to become a reserve currency, give it a few years and they will face the same fate as of the dollar. It is just a matter of time. The only countries that have been able to manage to stay afloat are the controlled exchange rate regimes — China and India. More free an economy with minimal policy controls, more vulnerable you are in this sort of a framework.

  • Posted by DC

    Let be honest that dirty politics are inseparable from economics. – DC

    Why China is an “extremely hated” nation along the Washington DC beltway
    by Justin Raimondo

    Americans and their international amen corner are daring to criticize China for preserving its own unity and sovereignty. It’s a double standard made all the more insufferable by the self-righteous tone of the anti-China chorus, whose meistersingers are mainly concerned with celebrating their own moral purity.

  • Posted by Anonymous

    “The only countries that have been able to manage to stay afloat” ?

    “While everyone in Europe is high fiving their currency and hoping to become a reserve currency” ?

    what’s a euro, or a soybean worth?

    “…My Peking University students tell me that they waste two or three hours a day more than they used to trying to access information on the internet. When I ask them why it has become so difficult, they tell me that there are a lot more things now that the government doesn’t want them to know… there is a tendency for Chinese corporations to project past price moves indefinitely into the future. For example soy prices have risen pretty steadily over the past few years, but every time there is a temporary reversal we get an onslaught of bankruptcies among Chinese soy pressers who took massive long forward positions on the assumption that rising prices can only keep rising… Should the dollar ever reverse part of its weakness (which I think is not only highly likely but nearly inevitable), Chinese exporters are going to get killed as the RMB strengthens against the dollar and the dollar strengthens against the euro…”

  • Posted by Anonymous

    “With 2008 touted as the Golden Age for distressed investing, the Asian distressed debt market is expected to experience explosive growth as the region’s default rates pick up from record lows and the market comes of age on a world stage. Asia is a goldmine, but the road to creating a robust Asian distressed debt market is a challenging one of negotiating complex legal regimes and overcoming transparency issues and cultural barriers. Distressed Debt Asia 2008 will bring together distressed debt investors, bankers, lawyers, restructuring advisors and consultants to discuss where the growth will come from, the legal and regulatory developments and changing profile of the distressed debt investor…”

  • Posted by Guest;_ylt=AmtyDrjLSNd0E4Q6kKBuZzSmOrgF

    Allan Meltzer, a professor of political economy at Carnegie Mellon University, says the Fed agreement to guarantee 29 billion dollars in troubled Bear Stearns assets was a mistake.

    “This action transferred potential losses from the market to the taxpayers,” he said. “I do not believe the present system can remain if the bankers make the profits and the taxpayers share the losses.”

  • Posted by bsetser

    Livingston — using the revised data (with a different income balance) the US current account deficit peaked at around 6.5% (in its peak quarter) and was 6.1% for a year (06). it is now around 5%. That is an important improvement, but the pace of improvement in the trade balance seems to have stalled b/c of higher oil prices. Oil alone will add about $100b to the trade deficit this year if prices stay around $100. i am not sure the non-oil balance will improve enough to offset that, tho it is possible if the us economy remains weak.

  • Posted by Guest

    “Allan Meltzer, a professor of political economy . . . ”

    I couldn’t reach the article you mentioned with your link – this may work.


  • Posted by DC

    Perhaps Hillary should ask her husband about US Aircraft Carriers off China’s coast along the Taiwan Straits to bomb Beijing, not the other way around. Chinese warships have never been deployed to California. – DC

    Clinton says China threaten US National security

    Clinton cited a discussion she had with a retired general who raised a “nightmare scenario” in which China threatened Taiwan and the U.S. president wanted to send ships toward the island to ward off Beijing.

    “He said, ‘You know, suppose the Chinese decide that they’re going to go after Taiwan the way we see them, you know, with Tibet,”‘ Clinton said, describing the general’s remarks and referring to the recent unrest in Tibet.

    “‘We start to move the fleet, and the Chinese say, ‘Fine. You do that, we will dump your dollars. We will flood the market. We will not buy any more of your debt.”‘

  • Posted by disgruntled observer

    Dr Setser. I understand that this forum is economic, but if you’ll allow me to just make a brief point to Dave Chiang.


    Whatever the US’s sins and there are many, there is no excuse for what is happening to Tibet. And I don’t just refer to the current repression. Eradicating a culture that was/is peaceful and harmonious is a monumental crime, no matter how you put it. If the people of china have an excuse its propaganda driven ignorance (I hope). You however live in the US, with the same access to information that I have, so you have no excuse peddling such views. Shame on you!

  • Posted by Guest

    disgrunted observer – the US is responsible for killing 25 million people since the end of WW2. a genicide only matched by Adolf Hitler. Only current war in iraq has lead to several millions of lives lost.

    and you are talking of china crimes – pathetic…