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Should the US worry about the drop in foreign demand for US long-term assets?

by Brad Setser
January 21, 2009

The latest TIC data provides yet more evidence that financial globalization — the rise in cross-border flows — has peaked. At least temporarily. Foreigners are buying far fewer long-term US bonds than they used too.

Look at a plot of gross foreign purchases of US long-term bonds and gross foreign purchases of US equities. Both are heading down. Net long-term bond flows are heading down too. Net equities aren’t heading down, but (see below) that is largely because Americans are now selling their foreign equity portfolio faster than foreigners are selling their US equities.

It is also striking, at least to me, that bond inflows have been so much larger than equity inflows over the past few years. Popular coverage of the “markets” in the US focuses on the equity market. But the capacity of the US to sustain its low savings rate hinged not on foreign demand for US equity but rather foreign demand for US bonds. Apart from a brief period around the .com craze, the US never financed its external deficit by selling equity to the world.

What is driving the fall in demand for long-term US bonds? Number one, a fall in demand for corporate bonds. Remember that all “private” mortgage backed securities are considered corporate bonds in the balance of payments data. Private US demand for foreign bonds is also falling.

The fall in demand for corporate bonds over the last three months has been quite sharp — comparable to the fall in the three months after the August subprime crisis. Then again, there is no need to look at the balance of payments data to know that things are bad.

But a second factor is now also at play. Central bank demand for long-term bonds is falling. Right now that is largely because central banks are shifting (rather dramatically) into short-term bills. But the fall in the pace of reserve growth implies that the overall pace of central bank purchases of both short and long-term US debt should eventually slow.

Over the past 12 months, central bank purchases of t-bills have exceeded total foreign purchases of equities by a factor of about four. Foreign purchases of long-term Treasuries (mostly from central banks) exceeded foreign purchases of equities by a factor of between five and six. And total foreign demand for Treasuries exceeded foreign demand for US equities by a factor of about ten.

If the US weren’t the US, I suspect analysts would now be worried about a fall in the quality of financing for the US external deficit. The US external deficit is increasingly financed at the short-end of the curve (usually a danger sign) and by the sale of the United States existing portfolio of external assets, not by the sale of long-term debt.

But the financing of the US deficit always has been a bit strange. The big surge in demand for US debt afterall corresponded with a weak dollar, not a strong dollar. It reflected a world where private capital was flowing into the emerging world, financing enormous reserve growth that fed back into enormous central bank demand for US debt. It that sense it wasn’t ever a sign of true strength.

And the surge in foreign demand for corporate bonds after 2004 clearly reflected the expansion of the shadow banking system. American money market funds bought short-term paper issued by various “vehicles” in Europe (and especially the UK) that bought long-term US debt. This flow reflected the need for institutions who borrowed short and lend long to take credit risk when the yield curve flattened as much as anything else. That intermediation just happened to be structured in a way that generated large cross-border flows. It didn’t, it turns out provide much net financing. That is why — at least in my view – the collapse of European demand for US corporate bonds didn’t force an immediate correction in the current account deficit.

Conversely, the surge in short-term inflows to the US coincided with the dollar’s recent rally. That in some sense is the puzzle. In the past, record demand for US financial assets was strangely enough tied to dollar weakness. And now a deterioration in the quality of the inflows is tied to dollar strength. Go figure.

Still, it is hard to be too worried about this shift so long as the dollar remains strong. Too strong actually. In the long-run, as Martin Wolf rightly notes, the US needs to be able to rely at least in part on net exports for growth. The dollar’s recent rally makes that harder.

Moreover, the current account deficit is going down not up, largely because of the fall in oil prices. That — together with the world economy’s broad-based weakness — seems to mitigate against a near-term dollar crisis. No one right now wants to see their currency appreciate. Not when exports are falling across the board.

At the same time, it is risky to finance a large external deficit with short-term debt. Even for the US. If the US deficit starts to head back up again — as, for example, the effect of the recent fall in oil prices wears off and a large fiscal stimulus in the US stimulates the world economy — without a shift in the composition of inflows, there would be cause for concern.

That just highlights a bigger issue, one that I don’t think has been settled: How will the world’s remaining current account deficits be financed in the post-crisis world? Right now, they are in some sense being financed by the unwinding of all the pre-crisis bets. And by running down existing stocks of foreign assets. But that process cannot last forever …

37 Comments

  • Posted by Cedric Regula

    Brad, I was wondering what are the current treasury holdings by Japanese private investors? I remember it was $700B in the first half of the decade, but I think it dropped off a lot.

    Also, the BOE says quantitative easing could be just weeks away. So I think maybe all the CBs in the developed world may have a really neat new toy to play with. Just have the CBs buy their government debt at ridiculously low interest rates with newly printed money. It’s so simple. No more need for real people to do it.

    But I think you should add that to your futures concern about how the G7 or 10 finance current account deficits in the future.

  • Posted by Cedric Regula

    Actually, I’ve devised a way to finance the current account account deficit in the future.

    We can nationalize Master Card. Then have the Treasury issue Consumption Bonds with a .25% coupon. Naturally, the Fed would have to step in and buy them as the richest and dumbest creditor of last resort.

    Then we all get a National Master Card with a spending amount funded with Consumption Bonds. Whenever the retail sales numbers fall, rinse and repeat.

    Whadaya think? Would the Chinese go for it?

  • Posted by Indian Investor

    Brad: Not when exports are falling across the board.

    I’ve discovered a starting exception. On the Bank of Russia web site, I noticed that Export of good and services in 2008, totaled up till Q3 were at $411.70 billion while imports were $ 211.76 b. In 2007 Russia’s exports (for the whole year) were $393.82 while imports were $ 282.67.
    The quarterly exports and imports in 2008 also show a rising trend.

    As of Jan 09 2009, Russia’s forex reserves are reported at $ 426 b. Total External debt also shows a surprising rising trend. The last reported total External Debt is at $ 540.50 b. Only $113.80 b of Russia’s external debt is short term maturity.
    The total includes external debt both in domestic currency and foreign currency. The foreign currency part of the total external debt is $427.80 b.

    All the above are numbers from the Bank of Russia web site.

    I read a press report that Russia’s forex reserves have fallen 27% from the peak due to interventions to defend the rouble. Since Nov 2008, Bank of Russia has been following a policy of orderly devaluation of the Rouble.

    Also I looked up the refinancing rate on the Bank of Russia web site and it shows that the rate went up from 10% in Jan 2008 to around 13% now. While the world has been cutting interest rates, Bank Rossi has been raising them. Since the Monetary policy includes mainly refinancing rate and reserve requirements, this may not indicate a reduction in money supply. Money supply seems to be growing.

    I’m guessing that the defense of the rouble was driven by reduction in foreign currency outstanding liabilities of Russia’s banking sector, but I still need to look that up.

    Overall it now looks to me that Russia isn’t anywhere near a currency/balance of payments/sovereign debt crisis a la 1998.

    There’s an ongoing issue with Russian gas supplies to europe through Ukraine: if Russia can indefinitely hold out on the forex reserve front, not needing an external financing bailout (in the old IMF Bailout style) that has very serious geo political implications as well. It changes the whole game.

  • Posted by ReformerRay

    Brad’s reoccuring question is “How can the current account deficit be financed?”

    My answer – the same as always. By running down assets in some U.S. account. It can be “decreased U.S. deposits in a foreign bank or increased foreign deposits in U.S. banks”. Double entry bookkeeping requires that the debit entry in the current account to pay for imported steel, for example, be matched by a positive entry in the U.S. financial accounts in the form of change in ownership of deposits. The important thing to note is that the positive entry returns money to the U.S. but that money is owned by foreigners.

    The final result of a purchase of steel from a foreigner is more steel in the U.S. and more formely U.S. financial assets owned by foreigners.

    The U.S. has always paid for its current account deficit by the fact that any import accepted into the U.S. results in a reduction in U.S. ownership of a financial asset.

  • Posted by ReformerRay

    how long with the U.S. have financial assets that can be run down to pay for imports?

    The Net Worth of households and non-profit organizations in the U.S. is estimated at 56.5 trillion as of the end of the third quarter, 2008. That is 7 trillion less than a year previous.

    The FRB Flow of Funds data show continued gain in Net Worth each year from 1995 to 2006 (except for a short blip in 2001-2002).
    The continous growth in U.S. Net Worth is the reason the U.S. trade deficit has been sustained for 3 decades. Follow the Net Worth figures down to see whether a point will be reached when foreigners will no longer be willing to sell goods to the U.S. at favorable terms.

  • Posted by ReformerRay

    Should be ” How long will –”

  • Posted by Cedric Regula

    Reformer Ray

    That’s they way it always used to work, but times are a changing.

    Japan invented quantitative easing around 2003. The BOJ bought $300B in near zero rate long term Japanese government bonds. The Government gets to stimulate things however they see fit. Japan likes paving things.

    In Dec 2008 Bernanke said he could do that too.

    Yesterday the BOE said they may be weeks away from doing it.

    So we have a trend where CBs around the world will have a claim on their country’s taxpayers.

    Will they forgive our debt someday? Or will there be a New World Order with Neo-Central Bankers as the most powerful figures in the world rather than playing second fiddle to Kings, Presidents, and Prime Ministers?

    This is the question we must contemplate.

  • Posted by Indian Investor

    @Brad:
    A great deal of your argumentation in recent times has focused on the fact that PBoC purchases of long term Treasuries, Agencies, etc artifically lowered US interest rates, thereby inducing excessive consumption, discouraging investment in sectors where there was Chinese competition, and inflating a current account deficit that is now hard to finance.Also your perception has been that China pursued a mercantilist policy, artifically weakening the RMB against the USD with currency interventions, which made US exports less competitive and Chinese exports more profitable.
    I believe that Keynesian insights were largely a result of analysis of real wages, an analysis that served to dispel many popular myths of the time. For instance, there was a widespread belief in his time that high unemployment levels were actually due to voluntary abstinence from work by workers who were unhappy with the wage levels.Also, there was a belief that economic recovery depended largely on wealthy people saving a lot of money and making it available for investment, so they should be tax-favored. These mythologies of his time are addressed in the famous 1936 work on a general theory of employment, interest and money.
    I think there is a great deal to be gained from analysis of real wages in the united states as opposed to real wages in countries like China. Doing this analysis will tell you a great deal about underlying realities, that have a great deal more to do with financing the US current account deficit than anyone probably realizes before doing that analysis.
    Secondly it would be interesting to know whether you have traveled to the countries whose policies you write so much about?
    I would think that people like British Foreign Secretary Milliband and columnist Thomas Friedman are probably less rigorous in their analysis compared to you. However, traveling and spending in what I would call “the real China” or in “the real India”, consisting mostly of villages, slums, tracts of forest, mountains and desert, where quite the largest part of their population lives; and traveling all around the large cities, rather than just in the main business centers, will tell you a great deal more than you can ever know from the balance of payments statistics.

  • Posted by ReformerRay

    Cedric Regula says that the fact that gvernments are now using their power to inject liquidity into the system means that the U.S. is no longer paying for its imports.

    Sorry, Regula, either I don’t understand your point or I don’t see the connection you are making.

  • Posted by ReformerRay

    The last chart Brad provides shows declines in foreign purchase of U.S. bonds and also declines in U.S. purchase of foreign bonds (if I understand the chart).

    That suggests that both actions represent a move toward cash – or near cash in the form of short term bonds. Seems inevitable until the crisis at hand is resolved.

  • Posted by bsetser

    indian investor –

    this is a blog based on the BoP data. there are other ways of understanding the world, but my goal here is to understand what can be learned from the bop data. I don’t have time to note in every post that it isn’t the only way of looking at the world but it clearly isn’t.

    you will have spell out to me why looking at real wages in the us tells us something about the reasons for the us current account deficit. I like parsimony, and it seems to be that where the dollar depreciated (v europe over most of the past siz years, tho things are changing) the US CAD fell, and where the $ didn’t move by much (Asia, generally speaking) the deficit didn’t move by much … the difference in real wages between us and china is clearly part of the reason for the imbalance, but the easiest way to increase China’s purchasing power v us purchasing power is a nominal rmb appreciation.

    in any case, let’s get back to the capital flows data — am i missing something in my analysis of it?

  • Posted by Cedric Regula

    Reformer Ray

    I didn’t say we aren’t settling imports in dollars immediately. We are, but we’ve financed our expenditures father into the future again, even more than usual.

    It’s just a matter of scale I suppose. Injecting liquidity used to mean FOMC purchases of short term T-Bills, and using Fed cash on hand to do it.

    They are now talking about the CBs printing money to purchase long term gov bonds, at artificially low interest rates, on a scale that is a significant percentage of GDP and National Debt.

    The thing that is different is no foreign asset holder needs to be involved to make up the difference for our foreign purchase. That void is being filled by the CB.

    Since treasury issuance gets added to the National Debt, the official debt rises, and the CB becomes a major creditor to its own country.

    At some debt level government debt gets downgraded. Many in the G7 are at or approaching this level, the US included.

    But if a CB wants, they can be a dumb creditor and keep performing this act without regard to risk/yeild concerns that private investors have.

    What happens next, I don’t know.

  • Posted by ReformerRay

    The fact that the U.S. is paying for our own imports implies to me that “no foreign asset holder needs to be involved to make up the difference for our foreign purchase.”

    I am arguing that foreign asset holder need not ever be involved because no one needs to make up the difference of our foreign purchase.

    Simplify.

  • Posted by Cedric Regula

    Reformer Ray:”Simplify”

    I’ll try.

    Here’s a quote from your first post.

    “The final result of a purchase of steel from a foreigner is more steel in the U.S. and more formely U.S. financial assets owned by foreigners.

    The U.S. has always paid for its current account deficit by the fact that any import accepted into the U.S. results in a reduction in U.S. ownership of a financial asset.”

    I’ll give a for instance that happened already. The BOJ printed up $300B in yen to buy 1% 10y Japanese government bonds, which is an asset that represents a claim on the Japanese taxpayer. The Japanese government used part of the money to buy rebar from US Steel for road and bridge construction. This is a Japanese import and the ultimate financiers where Japanese.

  • Posted by seatrus

    Obviously CBs around the world start to worry about inflation and the depreciation of USD.

  • Posted by Rien Huizer

    Brad,

    Surplus countries appear to have the same preferences as many private investors right now: liquidity, no risk, and happy (for the time being) with little or no return, i e the cash is king mentality. Treasury bills are the CB equivalent of banknotes. Continued issue of longer term treasury paper should then lead to lower prices, higher yields, upward sloping yield curve. Unless deflationary expectations are very strong, and certain financial institutions need (for risk/AL management purposes) to invest longer term in interest bearing securities and treasuries are the only type with acceptable default risk. All in all more likely than not that this is not a stable situation. What happened in Japan (very little yield curve effect for a very long time) may have had less to do with deflationary expectations there than with FI regulation and administrative guidance, as well as with the Zaito complex and huge excess savings in the private sector. Most of that does not exist in the US nor is it likely to arise in the near term.

    As to the impact of this extreme risk aversion among large natural cross border investors, that is indeed likely to increase de-globalization. It will be harder, or at least more expensive for countries to be net importers, unless they are under some umbrella.

    I think that the EU, for instance will be able to accommodate current EURO members and assist needy no-EURO ones (question marks for UK and Poland perhaps, there may be a political price. In one respect this crisis is fortunate, a few countries that could have become a problem for the euro once they were in, are now risking temporary disqualification.

    But the EURO bloc has been in rough BOP equilibrium for a long time, so it has the capacity to assist its peggers, clients and prospective members. I doubt there is an equivalent situation elsewhere. The private sector recycling infrastructure seems to be a casualty of the credit crisis, even to the point that ordinary short term trade finance (also a shadow banking area during the past ten years) has become much scarcer. The only way to get this going again is, probably, the creation of a much broader and bigger “world bank” that would buy large participations in international commercial bank outstandings (not a “bad bank”, on the contrary). The banks have the expertise but not the capital and the governments have the capital but not the expertise. The alternative would be international competition between national gvt export finance agencies, with all the agency (!) problems attached to that.

  • Posted by Michael

    Brad,

    Your best post yet on this critical subject. Thanks. Please continue in the future to share your analysis of the ongoing developments in the increased trend toward short-term financing of the trade deficit (especially since we are also seeing the burgeoning fiscal deficit being financed with short-term debt.

    The folks at the Fed and Treasury aren’t sharing their outlooks for where these trends can lead (the good outcome, the bad outcome, and the real ugly outcome), so we citizens rely upon rigorous, objective analysts like you to try to understand what we might be facing under different possible scenarios.

  • Posted by Ying

    It looks like to me that real wages determines price level and purchasing power. Can anyone explain why deflationary environment is bad for the economy? Since real wages are dropping, price should be allowed to drop to clear the market. By pumping more liquidity into the market and helping business sector,the consumer will be further squeezed in higher prices for goods and services. The economy will be mired in stagflation for a long time if there is no sweeping change to help consumers directly.

    Adjustment of exchange rate between dollar and yuan doesn’t convince me to solve balance problem. It would be too easy to do. The immediate sudden adjustment will only result in sudden worsening of standard of living for lower strata of workers in China and consumers in US.

  • Posted by Twofish

    Ying: Can anyone explain why deflationary environment is bad for the economy?

    Because the aggregate supply curve is L-shaped and not a straight line. You’d thing that when prices fall, the economy will adjust and everything happens at lower prices (Say’s Law). However what actually happens is that when prices fail, output crumbles.

    Ying: By pumping more liquidity into the market and helping business sector,the consumer will be further squeezed in higher prices for goods and services.

    If you are an Austrian, you say that this would happen. If you are a Keynesian, then pumping liquidity won’t cause higher prices as long as there is spare capacity in the economy.

    Ying: The economy will be mired in stagflation for a long time if there is no sweeping change to help consumers directly.

    What sort of help are you envisioning that doesn’t involve giving people cash.

  • Posted by Pawspuppypower

    I liked it. How do I trade this week and next to benefit? As I read it, we are doomed, but can I make a profit until then?

    I fear, as some wrote, we will deny the problem to the end, as we have for years.

    Who knows– you observations are helpful as is the question.

    Thx.

  • Posted by Observer

    Brad,

    Perhaps the current account deficits can be financed indefinitely by Fed’s currency swap facilities, giving the Fed enormous political leverage over Europe, Russia, and South America.

  • Posted by Ying

    Twofish:

    “What sort of help are you envisioning that doesn’t involve giving people cash.”

    My suggestions:

    -Sweeping review income distribution system. “Market” tends to polarize income and creates burden for economy. Cap income gap and set maximum wage.

    -Review globalization policy and promote localization and equal trade

    -Improve efficiency of the economy ( for example, promoting public transit instead of cars)

    - Provide one-tier health care system to improve efficiency and reduce cost

    - Extend unemployment coverage and duration

    There are lots Americans can do to improve their life and pull themselves out of recession. However, the main job Americans need to do is to establish some principles to guide themselves in making decisions. Some of them can be:

    -Promoting Income equality

    -Improving Efficiency of economy ( focusing
    on use value instead of exchange value)

    -Providing one tier universal basic health and financial security

    Politicians can’t have no principle but interest.

  • Posted by ReformerRay

    Cedric says “This is a Japanese import and the ultimate financiers where Japanese”. Yes, and the ultimate financer of U.S. imports are U.S.

    All of the cross border flows, other than those involved in payment for imports, are not necessary to have immports or exports paid for. They have their own purposes and reasons for existence.

    The U.S. trade deficit is paid for by the people who pay for imports. The size of the trade deficit is simply the difference between exports and imports for the U.S.

    Why does this seem so simple to me but is not accepted by others?

  • Posted by Cedric Regula

    ReformerRay

    I guess my concern was more about giving governments unlimited ability to issue debt by giving their respective central banks unlimited ability to print money to buy it.

    But you are free to worry about whatever it is you are worrying about.

    And as I say, its not just a problem with the US. The Japanese invented quantitative easing, and it looks like Britain will be the next to go that route ($1.36 sterling in anticipation).

    But it doesn’t stop there. Ireland just discovered they are broke, so that brings the list to three that I know of…Ireland, Greece and Italy..that will demand attention from the EU to come up with a solution about what does it do with its broke members.

    Scotland sounds like they are broke along England, and although I think England still has the right to auction off Scotland to the highest bidder to raise cash, we know the only potential bidder could be China. But the thought of the Scottish and Chinese trying to speak English to each other is to ridiculous to even contemplate, so I believe the Chinese will pass and continue pursuing Taiwan, and will likely complete the deal well before Microsoft completes the Yahoo deal.

    Then that brings us to Asia. Singapore just reported a 17% decline in GDP. Taiwan, Korea and the rest of SE Asia will be at least as bad. By comparison, the Western world is going into a tizzy over a few points of decline. India is having its debt downgraded to junk.

    So running the printing press could become a worldwide epidemic, and even if Keynesians do it they always seem to have trouble turning them off at the right time.

    I have some concerns about the future implications of that.

  • Posted by bsetser

    Cedric — ireland doesn’t have a nat’l printing press, and i rather doubt the ECB would run its printing press for ireland’s benefit. that is one of many issues for europe. ireland is gonna get stuck with a huge bailout bill and deflation as it adjusts — not a pleasant combo.

    and yes, export driven economies are getting clobbered. everything has gone into reverse.

    observer — the swaps supply dollars to the world right now, not financing for the us. they are actually a bop outflow, and in q4 a rather large one. if the us was borrowing euros from the ECB it would be rather different, but it isn’t …

  • Posted by Indian Investor

    Brad:
    you will have spell out to me why looking at real wages in the us tells us something about the reasons for the us current account deficit.

    The only reason for the US current account deficit with the Asian countries, Lat Ams, etc … appears to be the yawning gap in real wages. Similarly, you might observe that all the “wealthy” nations of the world, such as the Sverige in Northern Europe, and the United Kingdom in Western Europe, also have current account deficits with the countries where real wages are much lower.
    After some casual, anecdotal data collection on the topic, tailors in Bangalore get Rs. 3,000/= per month, and not Rs. 4,000/= per month as I earlier thought. A kilogram of rice in Bangalore, of the normal, non export quality can cost around Rs. 25/=.
    There are millions of Indians and Chinese producing various goods and services for the US and other European countries with their labor, which is priced at just about enough for them to have basic survival.
    A teenager in Jersey can earn around $7 per hour working at a store.What is the price of a pound of potatoes in Jersey?
    Currency intervention is the mere icing on the cake for US importers.The cake itself is the slavery-level wages of the ‘Emerging’ exporters.

  • Posted by Indian Investor

    By studying real wages you can understand the impact of dismantling the current account deficits. Either you have a new system where US manufacturing has to yield the same kind of real wages as what laborers get in places like the Peenya Industrial Area in Bangalore. Alternatively, you get a system where the real wages of US laborers has to be supported by paying a reasonable wage for them. In the latter case the same goods and services that were imported at a throw away price from China now become so expensive that the impact on aggregate demand is disastrous.
    As far as emerging markets are concerned the dismantling means that the meagre income from this export activity is now gone. There isn’t any Social Security system or anything like that to pay a dole to the thousands of fired tailors and laborers. Having a job isn’t a choice in India. If you can’t earn, you’re unlikely to survive, biologically.

  • Posted by Observer

    Brad, sorry that I didn’t make this clear, but my original question was whether the Fed could finance other deficit nations with the dollar by using currency swaps.

  • Posted by bsetser

    observer — yes, it can. tho right now it is financing european countries that don’t necessarily have large deficit but who do have banks with a lot of $ liabilities that they need to repay.

    indian investor. a rise in the currency of key EMs would be the easiest way to reduce the difference in real wages between many EMs and the US. ving — it would make china’s workers (those outside the export sector) better off. and i never found the arguments that the boom in china was keeping the real wages of low income workers in the us up all the convincing — yes, imported manufactured goods were cheap, but commodities weren’t (not during the boom) and that was due to the impact in part of non-US demand. and, the data hardly supports strong median real wage growth during this period; workers shed in manufactring found employment elsewhere but also exerted downward pressure on wages. the winners from all this in the us always seemed to me to be in the financial sector … at least until the game imploded. the fall in treasury yields produced some big windfall gains for a while.

  • Posted by Cedric Regula

    The multinational importers also made out well for a while. It’s actually illegal to sell “below market” in the US, so someone had to mark up that cheap labor.

    But emerging Asia tends to take this as a fact of life because they haven’t got the international marketing clout to enter foreign markets on their own.

    But China has cited this as a shortcoming that Chinese biz should try and correct.

  • Posted by Indian Investor

    It would be very useful to me if somebody could let me know whether I’m correct in thinking that Russia isn’t close a currency crisis/BoP crisis of the 1998 at least for a year or more ahead.
    IMHO, Gazprom is hoping for a European external financing loan to Ukraine that will then be paid off to settle Gazprom dues. Europe’s motivation would be to have 80% of its petroleum gas supplies resume. At ECFR, you can find a lot of discussion ont he European dependence on Russian petrogas supplies.
    This dependence seems to me to obviate further discussions with Russia on NATO membership for Ukraine and Georgia, that were shelved after the Georgia invasion.
    As long as Russia is strong, the geopolitical conflict will continue. I’m expecting no easy victory for Obama’s troops in Afghanistan. The military objective in Afghanistan is to construct a new oil pipeline south from the Caspian to the Arabian sea, down through Afghanistan and Pakistan.Russia will fund and help the Taliban as much as it can, since Russia’s exports will be seriously by an Afghan victory for the US troops.
    These conflicts, with large scale disruption of critical supplies and medium intensity wars, are internecine and cause a heavy drain on the economy everywhere.
    Unless these issues are solved, there isn’t too much of a point to think of an economic recovery.

  • Posted by zanonz

    What’s wrong with given consumers cash? A payroll tax holiday is the best Keynesian stimulus in 2009

  • Posted by Indian Investor

    Brad:
    in any case, let’s get back to the capital flows data — am i missing something in my analysis of it?

    As I mentioned before, it’s quite likely that a new increased foreign inflow to the emerging markets infrastructure sector has started. For instance, the power sector in India, as I’ve pointed out before, is a sector that can yield good profits from the fact that there is an unmet demand for power, that consumers are willing to pay for. The power supply has to be cut for say a couple of hours a day for several weeks, and then intermittently, due to shortage of supply.Consumers don’t save much on the bills as a result of the cuts, and don’t want to. This is what I’m talking about as a situation of a supply side problem in a global macro situation of fall in aggregate demand.

  • Posted by Twofish

    bsetser: yes, imported manufactured goods were cheap, but commodities weren’t (not during the boom) and that was due to the impact in part of non-US demand.

    High commodity prices were very, very good for most Chinese. Most Chinese were farmers and last year was very good for farmers because high commodity prices means high food prices and the state subsidized prices of inputs like oil and fertilizer. Late-2007/early-2008 was one of the best years for rural China in a long time.

    bsetser: The data hardly supports strong median real wage growth during this period.

    The commodity boom didn’t last long enough to make too much of a statistical difference. Also there was very strong median real wage growth for Chinese workers from 2001-2008. The wage/GDP ratio went down, but personally I think wage/GDP is a pretty bogus statistic to measure worker well being. The other thing is that in 1998, most Chinese companies and banks were on the verge of bankruptcy so the fact that China was able to recapitalize the banks and the industrial sector was a good thing, since having high but unsustainable wages may not be that great a deal.

    If the export boom didn’t help people that much, then why is everyone going crazy now that it may be over?

  • Posted by Twofish

    Ying: -Sweeping review income distribution system. “Market” tends to polarize income and creates burden for economy. Cap income gap and set maximum wage.

    The problem is that if you cap income and maximum wage, then people find ways of getting benefits without explicitly increasing income. This is a bad thing. Also, there are situations in which you *want* people to have large amounts of money.

    You can fix this with progressive taxation. Make as much money as you want. Just give lots of it to people that don’t have it.

    -Improve efficiency of the economy ( for example, promoting public transit instead of cars)
    - Provide one-tier health care system to improve efficiency and reduce cost
    - Extend unemployment coverage and duration

    All these require large amounts of money. Also, things that seem to promote efficiency can be taking overboard. Once you start spending large amounts of money on public transit, then you will have a public transit lobby that will try to get the government to keep spending money on public transit, whether it has any public benefit or not.

  • Posted by Twofish

    The problem with lots of purchases of short term assets is that if you use short term assets to fund long term spending, then if those short term assets disappear, you have a big, big problem.

  • Posted by David

    I was a reporter covering the credit market as the bubble inflated, and saw first hand the impact of massive foreign inflows into both corporate bonds and various kinds of mortgage debt. This article has some unique insights on what happened:
    http://djr-musings.blogspot.com/2009/01/trade-and-mortgage-stupidity-index.html

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