Can the improvement in the US trade balance continue?
The US trade deficit — which is a good proxy for the current account balance (the income surplus offsets a transfers deficit) — is now around $40b a month. At its peak it was more like around $60b a month. That implies, if nothing changes, the 2009 current account deficit would be around $500b, down from a peak of $700b.
In fact, if nothing changes the trade balance balance might improve a bit more. The US imported an unusually large amount of oil in December, and that rise in volume obscured some of the benefits from the fall in the price. The US paid an average of around $95 a barrel for its imported oil in 2008, but only about $50 a barrel in December.
Remember this the next time someone argues that the US will be borrowing more from the rest of the world to finance its fiscal deficit: the total amount the US borrows from the world is defined by the current account deficit and the current account deficit clearly went down in the fourth quarter even as the US fiscal deficit (and the Treasury’s borrowing need) soared. That is because the rise in government borrowing offset a contraction in private investment and a rise in private savings.
Of course, it would be far better if the global economy adjusted through strong growth abroad not a collapse in private US demand growth. But, well, we are where we are. Y/y nominal non-oil imports were down about 10% in December. Nominal export growth was down a bit less, more like 8%.
Real goods exports and real goods imports are both falling. The improvement in the non-oil trade balance now reflects a faster fall in imports than exports.
US real import growth has been weak for a while now. Until a few quarters ago though real export growth was strong. Not any more.
Real exports could soon start to fall faster than real imports.
If the stabilization of US imports reflects the stabilization of the US economy then it would be good news. But a faster stabilization in the US than in the world — together with a strong (ish) dollar would also push the non-oil deficit back up over the course of 2009. Forecasts that the US deficit will fall to 2.5% to 3% of GDP strike me as optimistic.
The net result: I expect a slowing global economy to take a toll on US exports and do not expect much additional improvement in the US current account balance. I’ll be watching closely to see if the markets are willing to finance a growing deficit …. and, for that matter, if China is willing to finance a growing US deficit and add to its already considerable exposure.
China’s January surplus ($39.1b) is roughly the same size as the United States’ December deficit ($39.9b). It is reasonable to think it will roughly match the United States January deficit as well.
The extreme symmetry captures something real. Deficits and surpluses are shrinking globally now that the price of oil is at levels that roughly cover the oil exporters imports.* Right now China’s (growing) surplus is clearly the main counterpart to the United States’ (shrinking) deficit.
* Actually is a bit lower than the price most oil exporters need, so some oil exporters will need to sell their existing assets to cover their import bills.
well if the yuan is no longer undervalued
http://www.economist.com/finance/displaystory.cfm?story_id=13059709
“The extreme symmetry captures something real. ”
This is just absurd. It is like that you believe that the stock market has a lot to do with the length of women’s skirts.
Thanks for confirming that financing of our domestic fiscal deficit is independent of our need for foreign debt. I’m an amateur economist, and frequently find the need to reconfirm these basic concepts, given the amount of malarky coming out of politicians and the MSM.
The question on China is interesting. Seems to me they either reduce their exports to the US, or import more to get in balance. Alternately, I suppose they could invest their excess dollars in another country, but then that country would accrue the US debt. On the US side, increasing interest rates would seem to be an offset, besides attempting to export more or import less.
“But, well we are where we are.” So true and sadly funny.
Well, we can hope Asian demand doesn’t collapse and they stabilize soon …
Joe K:
“Thanks for confirming that financing of our domestic fiscal deficit is independent of our need for foreign debt.”
Yup. That’s what our big Army is for.
“The question on China is interesting. Seems to me they either reduce their exports to the US, or import more to get in balance.”
That’s why we have balanced trade with China.
“Alternately, I suppose they could invest their excess dollars in another country, but then that country would accrue the US debt.”
GREAT IDEA ! You could run for President with that as a platform.
“On the US side, increasing interest rates would seem to be an offset, besides attempting to export more or import less.”
We can’t raise interest rates in the US because that would be bad for the Chinese economy.
Given the continued desire (if not ability) of other countries to build up their dollar currency reserves and the slide in the U.S. trade deficit, it is likely that the dollar will gain value in the currency markets (except against the Yen). This will be painful for U.S. exporters but even more painful for China since the Yuan will get dragged up with the dollar. Chinese goods may get priced out of Asian markets where the currency floats freely. How will the Chinese government handle the internal political pressures that this will cause?
So as a country we improve to borrowing only $500,000,000,000/yr. A relatively good year. How long is that going to go on?
The day will come when the world wants no more US$’s & it will be a momentous day.
-The trade deficit is down
-The budget deficit is up
=> more government bonds will be sold to “rational and market-oriented” buyers.
=>stimulus to the US economy
…to elaborate
If the US issues a T-bill to a US citizen, and pays the proceeds to another US citizen, the result will be that these two individuals collectively feel themselves richer. =>increases consumption/investment
If the US sells the bill to China, this effect wont happen.
This is why we are up for a nice stimulative effect going ahead. theis would have happened EVEN IF there would not have been any stimulus program. That program enhances the effect even more.
fatbrick, if there are only two countries in the world and one runs a large surplus, the other has to run a large deficit. that oversimplifies, but i hardly think my argument is absurd.
“Remember this the next time someone argues that the US will be borrowing more from the rest of the world to finance its fiscal deficit: the total amount the US borrows from the world is defined by the current account deficit and the current account deficit clearly went down in the fourth quarter even as the US fiscal deficit (and the Treasury’s borrowing need) soared”
It’s not clear to me why the above statement should give anyone comfort. Either the current fiscal deficit gains inflationary traction and leads to an increased future current account deficit, or it doesn’t and we default on our massive debt. Either way, our external borrowing costs will rise.
To the extent that our fiscal deficit is funded internally, private investment will suffer. Unless you believe that government is so efficient that they can borrow money, process it through the legislative/bureaucratic system, disburse it with a political agenda, often to the least productive segment of the economy, and thereby lead to more private investment and production. Not likely, IMO. I would posit that fiscal deficits have led to our current overconsumption relative to production (redistribute capital from producers to consumers), creating a current account deficit. Over the long run, fiscal deficits cause current account deficits and this fiscal stimulus will do the same. If foreign lenders don’t step up, the dollar will crash.
Brad: the total amount the US borrows from the world is defined by the current account deficit
Me: Is it possible to expand on this? Suppose there were only two countries, the US and China. If US citizens import more, and the dollar falls in response, that should take care of the ‘trade deficit’, with no implications for the US Govt. finances. This is an important concept to understand. I think there are many people who aren’t clear exactly why imports higher than exports lead to a liability for the Government.
indian:
It’s really quite simple. I propose we give them Alaska and call it even. Alaska has oil, plus China will be surrounding Russia on two sides then. Russia gets paranoid about things like that, so it’s always fun to yank their chain a little.
So a little biz, a little pleasure, and the matter is resolved.
But Brad probably has something different to say about it.
Hi Brad – please help me out I’m apparently a moron.
> Right now China’s (growing) surplus
> is clearly the main counterpart to
> the United States’ (shrinking) deficit.
What works for my sub-optimal logic is that a growing surplus should lead, in the counter party country, to a growing deficit.
Hi Bryce:
You apparently don’t know your history very well.
Here: read about the Plaza Accord of 1987
http://en.wikipedia.org/wiki/Plaza_Accord
You know the funny thing about macroeconomics? Sometimes it works exactly as predicted.
indian
Or we could try it this way. Suppose I buy a Chinese refrigerator tomorrow and put it on my Wells Fargo credit card. I plan to pay it off in 6 months, and since I have income from a money market fund, I have no problem completely paying it off.
So somehow I’m to believe that this causes the USG to issue a treasury bond, but I find that I did NOT receive the proceeds of the treasury bond.
This seems rather baffling to me as well.
“fatbrick, if there are only two countries in the world and one runs a large surplus, the other has to run a large deficit. that oversimplifies, but i hardly think my argument is absurd.”
Brad, didn’t you write a paper on so-called “dark matter” ?
Brad, purely for amusement purposes, suppose you drew a graph of the trade imbalance vs. GDP.
At what level of GDP would the trade imbalance vanish?
Charles
Just going by memory, for the last decade or two, as US GDP increased, the trade deficit also increased. So we need to head towards zero GDP to reduce it. That would balance China first, but then there is oil. That’s the really tough one.
anon (is that a french name?)
But speaking of funny papers(I remember Brad’s paper “dark matter”, but I forgot what it was about, so I’m not picking on Brad.), why don’t we drag the one out Bernanke did on “the global savings glut”.
That should be quite entertaining now that Ben has all this money he needs to print.
Russia’s non-CIS imports down 35.6%
11 February 2009
Provided by: ITAR-TASS World
MOSCOW, February 11 (Itar-Tass) —— Russia’s imports from countries outside the Commonwealth of Independent States (CIS) fell 35.6% on the year and 60.7% on the month to U.S. $7.5 billion in January, the Federal Customs Service said in a report obtained by Prime-Tass on Wednesday.
Imports of machinery fell 46.9% on the year to $3.276 billion in January, while imports of food products decreased 24.9% to $1.285 billion, imports of chemical products fell 28.9% to $1.139 billion, and imports of textile products and footwear fell 2.7% to $586.3 million, the customs service said.
menomnan — there is a third player, namely the oil exporters, which used to run a large surplus and now run a small deficit … factor that in and it all works out. the us deficit is falling b/c the surplus of the oil exporters is falling. that more or less just leaves china’s surplus to offset the US deficit. if the oil exporters were not semi close to external balance that would change.
[...] Can the improvement in the US trade balance continue? (Setser) [...]
If this road continues there will be gold against all those dollars (and other high flying fiats) /first the IMF takes the stand
Do we have a buyer?
Indian Industrial Production shrinks again, by 2% in December
After contracting for the first time in 15 years in October, industrial production again crashed by two per cent in December against a growth rate of as much as 8 per cent a year ago despite a stimulus package announced by the government to boost sagging demand.
The manufacturing sector, which has a weight of about 80 per cent in the Index of Industrial Production (IIP), registered negative growth of 2.5 per cent against a rise of 8.6 per cent in December 2007.
Indian Investor : Are you changing your views on Indian growth story and positioning on NIFTY LONGS /CALLS ?.
ABOVE POST..
Indian Industrial Production shrinks again, by 2% in December
China is doing something better with its US Dollars than investing in US Treasury bonds or AAA-rated Subprime Garbage marketed by Wall Street Banksters ….
http://www.cnbc.com/id/29150973
Chinese state-owned aluminium group Chinalco will invest $19.5 billion in miner Rio Tinto in a deal that will secure resource supplies for China and help cut Rio’s debts.
As part of the biggest overseas investment by a Chinese company, Chinalco will spend $12.3 billion on stakes of up to 50 percent in nine of Rio’s mining assets.
It will also buy $7.2 billion of bonds convertible into shares of the world’s largest aluminium maker, second-largest iron ore miner and a top-five copper producer.
Chinalco, the parent of listed Aluminum Corp of China (Chalco), will potentially double its stake in Australia and London-listed Rio to 18 percent, Rio said.
Will the US Trade Deficit continue to improve. Absolutely “Yes” as Americans begin to build their savings rate which is a great improvement …………..
http://money.cnn.com/2009/02/12/news/economy/savings_rate/index.htm?postversion=2009021204
“In the long-term, it’s best for Americans to save more. But right now, with the economy underwater, it’s the worst time for that,” said Rich Yamarone, director of economic research at Argus Research.
The savings rate, as calculated by the Commerce Department, hit 3.6% in December, or the equivalent of $36 for every $1,000 of after-tax income.
That’s up from 0.8% in August, or only $8 of every $1,000 of income.
Don’t listen to “stupid” Neo-liberal US Economists, Americans need to and should save more of their money for their futures.
German bund auction failure. second time in few months.
EU is going down baby !
Feb. 12 (Bloomberg) — The Federal Reserve Bank of New York is in talks with at least four firms to expand the network of dealers that underwrite government-bond auctions as the U.S. prepares to sell more than $2 trillion in debt this year.
They were 30 before the workload is heavy very few days this year without TB issuance
Which one will be faster decreasing current account deficit or primary dealers increase?
I know I am a dope, but in this debt mongering nation whose lauded economists take Keynes name in vain and try to discredit Friedman, isn’t a declining trade deficit bad (especially since exports are declining)? Who is gonna fund all the so called Keynesian deficit spending? I know all the new savers, but what about Fisher, he knew that of which he spoke? Interest rates are gonna have to rise, and when that happens, CRE and housing will go down much further, once the train leaves the station you can’t stop it with Voodoo, its gotta crash or it will just keep on going to full fledged socialism which I guess the majority in this once great country support since they pay little of the income taxes anyways. Just remember socialism works okay in Europe (I guess), but the Europeans don’t spend 10 times more than any other nation on the planet on defense or more than all the other nations on the planet combined on defense.
Kafka:
Congress already fixed F&F rates at 4.5%. So that will insulate mortgages and housing from increases in long term treasury rates.(somewhat, but not jumbo loans). If treasuries go above 4.5%, they will have to deficit spend to supplement the difference, of course. So call it partial nationalization of housing.
But higher treasury rates will clobber all the other fixed income paper out there. But we new that had to happen someday anyway.
But so far this week’s treasury refunding is going swimmingly. Little 10y bond rally today, buck is up, gold up a little but not much. Yawn.
But I have another idea to resolve our little debt issue with China. We could give them New Hampshire and call it even. Interesting thing about New Hampshire is they have a bunch of trees. These could be cut down and made into any currency you want! Even a basket of currencies if we find out that BW3 prescribes this as the way to go. And Howard Dean could go far in the Communist Party
I recommend not getting overly excited about euros, however.
Cedric, fair enough, but the Gov is gonna have to subsidize and that only covers about half the housing market and essentially does not touch the pending implosion in CRE. My view, you can only play wackamole with econometrics for so long, eventually the simple math will prevail and in this case, the simple math proves you can’t beat a liquidity trap with more debt.
putting the lipstick on DJC
http://www.ft.com/cms/s/0/ba857be6-f88f-11dd-aae8-000077b07658.html
China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world…
Luo Ping, a director-general at the China Banking Regulatory Commission, said… “Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”
Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”
cheers!
Correction to my above post:
I meant Vermont, not New Hampshire. I get those mixed up sometimes, even tho I know that people in those states never would.
Kafka:”My view, you can only play wackamole with econometrics for so long, eventually the simple math will prevail and in this case, the simple math proves you can’t beat a liquidity trap with more debt.”
Agreed, so I think the way this medicine really works is Banks get a bunch of of money, and start doing the short rate to treasury bond carry trade again. So we get to wait again for that time bomb to explode.
Roubini breaks ranks with TG.
Recommends nationalizing banks, then re-structuring and eventual privatization to avoid the certain future problems we will get with a Congress run F&F.
Problem is we aren’t doing it this way.
http://finance.yahoo.com/tech-ticker/article/174326/Roubini-Nationalizing-Banks-Is-the-Best-Way-to-Go?tickers=C,BAC,MS,GS,^DJI,JPM,WFC
Lets see, Roubini has been right most of the way through this mess but what does he know? Geithner helped bring this mess, he must know the answers except it is likely the answers are coming from Summers to benefit his hedge fund buddies. Buiter has a simple answer but the Politicos and their pals won’t profit from that, so lets make the problem undefined and complicated (when it isn’t) and then all the Politicos and their pals can profit. The math is simple and the cash trail never lies.
Love the Lou ping quote!
INformation Velocity at work..got this via twitter
http://dealbreaker.com/2009/02/how-to-solve-the-slump.php#c4
Brad: “I’ll be watching closely to see if the markets are willing to finance a growing deficit …. and, for that matter, if China is willing to finance a growing US deficit and add to its already considerable exposure.”
As I’ve said so many times it must be becoming a bit tiresome by now, China (and other Asian countries) will be more than willing to finance U.S. deficits to keep up their exports. Change in this strategy will come only from U.S. pressure to stop it.
Cedric: “Or we could try it this way. Suppose I buy a Chinese refrigerator tomorrow and put it on my Wells Fargo credit card. I plan to pay it off in 6 months, and since I have income from a money market fund, I have no problem completely paying it off. So somehow I’m to believe that this causes the USG to issue a treasury bond, but I find that I did NOT receive the proceeds of the treasury bond.”
Here is a better exposition. A Chinese merchant sells the refrigerator to a U.S. buyer. Instead of trading the dollars for yuan on the open exchange market, it sells them to the Chinese Central Bank. The Bank uses the dollars to buy U.S. Treasury bills. There is nothing in the transaction that necessarily increases debt of the U.S. government or of the U.S. as a whole. The U.S. government does not need to issue new T bills to facilitate the transaction. The T bills could have been sold by a foreign holder or by a U.S. holder.
Even if sold by a U.S. holder, the seller may have bought some other type of dollar-denominated debt. All that can be said is that the loan from the CCB has increased the supply of dollar-denominated credit and so tended to hold down U.S. interest rates. This could lead to an increase in U.S. borrowing, but it could also lead to a decline in other foreign lending to the U.S or to an increase in U.S. lending to other countries (e.g., the T bill seller might have bought a Bundesbank bond to replace the T bill).
Thus, the Chinese loan will lead to an increase in borrowing by someone, but the end result is indeterminate. It could result in a net increase in U.S. borrowing (and a matching increase in the U.S. trade deficit), or it could result in a net increase in borrowing (and movement toward trade deficit) in other countries. In fact, the increase in lending might even find its way back to China (with a private capital inflow outflow offsetting the official capital outflow), in which case it would have no net effect on China’s trade balance or on that of any other country.
What is the most likely result? Because the CCB purchase increased the supply of dollar-denominated loans, and because currencies are imperfect substitutes, the effect on borrowing is likely to be larger for the U.S. than for any other country.
State-owned Bank of China likely to buy AIG’s Asian operations for $20 billion …….
Bank of China Ltd. (0349.HK) has emerged as Beijing’s preferred choice as a potential bidder for the Asian life assurance unit of American International Group Inc. , which analysts estimate is worth about $20 billion, the Financial Times reported Wednesday, citing unnamed people familiar with the matter.
http://www.marketwatch.com/news/story/beijing-backs-bank-chinas-move/story.aspx?guid=%7BA20220F1-F9D8-4A98-AAFF-41BBE6686299%7D&dist=msr_1
U.S. Prepares to hammer Hard Issues With China
http://www.nytimes.com/2009/02/11/washington/11diplo.html
WASHINGTON — The Obama administration plans to realign the United States’ relationship with China by putting more emphasis on climate change, energy and human rights, widening the focus beyond the economic concerns of the Bush years, according to senior administration officials. Yet the new focus, which is being championed by Mrs. Clinton, carries serious risks, experts said, because it could aggravate global tensions.
[...] Can the improvement in the US trade balance continue? The US trade deficit — which is a good proxy for the current account balance (the income surplus offsets a transfers deficit) — is now around $40b a month. At its peak it was more like around $60b a month. That implies, if nothing changes, the 2009 current account deficit would be around $500b, down from a peak of $700b. … Deficits and surpluses are shrinking globally now that the price of oil is at levels that roughly cover the oil exporters imports.* Right now China’s (growing) surplus is clearly the main counterpart to the United States’ (shrinking) deficit. [...]
Informed people -
Firstly, I should say I much appreciate this blog & all who contribute.
Second, I need help. Can someone tell me, have I got this scenario straight ? :
US consumer buys Chinese product ( T shirt, plastic toy, etc etc )
US consumer dollar goes to Chinese exporter who gives it to Chinese Central Bank in exchange for Renminbi.
Chinese Central Bank gives back dollar to US Govt ( by buying treasury ) .
US Govt spends dollar on Defence Project / Health / Welfare / Debt Repayment etc etc.
All hunky dory until now… we have a Credit Crunch.
So now …
US Consumer buys a lot less Chinese exports.
Chinese exporter out of business.
Chinese worker very unhappy & broke.
**Chinese Central bank now has a lot less dollars coming in** to hand back to Uncle Sam – at the same time as Uncle Sam wants to vastly INCREASE Govt. spending.
Therefore … Uncle Sam has ( or should I say ‘will eventually have’ ) big funding problem?
In a nutshell , even if China really really wanted to keep buying US treasuries at the usual rate, it would concievably not be able to, because there simply will not be enough dollars coming in ?
I pose this as a question because ( as is probably obvious ) I have no idea what I’m talking about. So , all you learned folks, am I going wrong somewhere ? And if so, where ?
kafka — Interest rates are gonna have to rise, and when that happens, CRE and housing will go down much further, once the train leaves the station you can’t stop it with Voodoo, its gotta crash or it will just keep on going to full fledged socialism which I guess the majority in this once great country support since they pay little of the income taxes anyways.
isn’t this where the fed monetizes everything it takes to keep the ten-year below 3.5%?
i think it was ray dalio’s recent commentary in barron’s where he expected deficits would be greater than savings and the fed would be forced to monetize to prevent a yield spike. i imagine he’s expecting a greater collapse in the chinese surplus/american deficit pair — something along the lines seen in the last go-round in the 1930s — to collapse the vendor finance recycler.
chaingangcharlie:
Looks like you got it exactly right as far as I can tell.
It’s a very good bet US consumers won’t be buying at the same rate as usual. That means less dollars to China, and less bouncing back to the treasury.
We intend to watch Brad track the data and graph it. We like to make a science out of things.
brad: “menomnan — there is a third player, namely the oil exporters, which used to run a large surplus and now run a small deficit … factor that in and it all works out…”
thanx Brad. And I do remember (now) that you set that out at the beginning.
It would seem not that I failed in putting 2 and 2 together. It would appear that I failed in putting 2 and 3 together correctly. As it were.
I had majors in computer science and Japanese when in college (Berkeley). I took one macro (economics) course. My only real memory is puzzling over the iconic supply vs demand curve when it was first presented. There was something bugging me.
And then I realized: they put the independent variable on the y axis. Wow. I could say more – but I’d best not.
And then later yet it occurred to me: could they even have _done it_ the other way round (put the independent variable on x and not y).
Cedric Regula says, “So we need to head towards zero GDP to reduce it [trade deficit].”
This is the point with which I was needling Brad, Cedric.
Unfortunately, I don’t think he’s going to do the calculation.
chaingangcharlie –
your analysis of US imports/ China’s exports is right.
but you leave out a key variable,namely china’s imports. china is receiving fewer $ for its exports, but it also paying far fewer dollars for its imports. as a result, its trade surplus is going up — and china actually has more money to invest in the world than it did before even as its exports are falling.
the complication tho is that this investment is now largely being done by private chinese investors moving funds out of china rather than by china’s government (at least that was the case in q4). in aggregate though china’s surplus is rising, and thus so are the foreign assets of Chinese residents.
brad (sorry to bug you again) In this regard:
chaingangcharlie: “…US consumer dollar goes to Chinese exporter who gives it to Chinese Central Bank in exchange for Renminbi. Chinese Central Bank gives back dollar to US Govt ( by buying treasury ) …”
But isn’t there a parallel story?
Each morning Chinese central bankers go to work. Central banks, in the west, are construed as: control inflation (high interest rates) or promote growth (low interest).
But the task may be different in China. Although this method (and role) were probably pioneered in Japan (where I lived for 6 years).
The central job is to print yuan and use these to buy dollars each day so as to maintain a fixed (and low) rate within a changing forex regime.
So if that has a sufficient measure of truth to it: how much of those $1.9 or whatever in reserves were from ( US ) currency purchases for maintaining the exchange rate?
I’ve sort been operating on this premise, although am curious to know the relative portions of a) repatriated profits and b) dollars acquired in maintaining the forex rate.
The remaining problem, and the one I spend the most time on these days, is to better understand ’sterilization’. That is, the means by which all those newly printed yuan don’t cause massive inflation within China.
Special (devoted to this purpose) domestic bonds; increases in reserve requirements for domestic banks; etc.
So, did anyone notice that US merchandise exports rose 82.3% over the past five years? And, that exports to China rose 152.6% in 2003-08 ?
Or, that imports from East Asia (China, Japan, NICs and ASEAN) actually fell? That’s just the fourth time since 1980 that such a thing has happened (the previous times were in 1982, 1991 and 2001), and the only time that the drop from Asia didn’t coincide with a decline in overall imports.
Did anyone notice that imports from East Asia were 38.1% of total imports, the lowest ratio since 1985?
*sigh* I didn’t think so.
- – - – - – - – - –
menomnom,
The Plaza Accord was in September 1985.
- – - – - – - – - –
Cedric Regula,
One man’s T-bill is another man’s Chinese refrigerator . . .
@Cedric Regula :
” Looks like you got it exactly right as far as I can tell. It’s a very good bet US consumers won’t be buying at the same rate as usual. That means less dollars to China, and less bouncing back to the treasury.
We intend to watch Brad track the data and graph it. We like to make a science out of things.”
Good good I like it when i get things right …& I too like to make a science out of things.
@ bsetser :
“your analysis of US imports/ China’s exports is right…but you leave out a key variable,namely china’s imports. china is receiving fewer $ for its exports, but it also paying far fewer dollars for its imports. as a result, its trade surplus is going up — and china actually has more money to invest in the world than it did before even as its exports are falling.”
Now, this ‘paying far fewer dollars for it’s imports’ thing : This is because it is simply buying far fewer imports ? ( IE It doesn’t need to import so much goods etc to transform magically into exports because the demand for exports isn’t there any more ) ?
But this bugs me, because presumably they were making a dollar profit on this business? ( buy imports for dollars, add value , export for more dollars , rinse, repeat )
You seem to be saying, by exporting less, and thus making a smaller dollar profit, they are making a larger dollar profit. This sounds ( ahem) implausible to me . Obviously I am missing something ?
“the complication tho is that this investment is now largely being done by private chinese investors moving funds out of china rather than by china’s government (at least that was the case in q4). in aggregate though china’s surplus is rising, and thus so are the foreign assets of Chinese residents.”
Again, I’m wondering where these apparent extra new dollars are supposed to be coming from. Unless they were in fact always making a hefty dollar LOSS on their export trade ( versus the cost of importing raw materials etc etc ) I don’t see how a loss of exports can land them with MORE dollars – unless possibly they are running down already-paid-for stocks of raw materials etc ?
If this is the case, clearly it can only be a short term phenomenon , as you can’t run down stocks forever.
Again, what am I missing ?
don: As I’ve said so many times it must be becoming a bit tiresome by now, China (and other Asian countries) will be more than willing to finance U.S. deficits to keep up their exports.
And as I’ve pointed out many times, no they won’t.
There wasn’t a master plan to increase exports, it just sort of happened. Now that everything has blown apart, people are stepping back and trying to figure out what to do next, and none of the plans that I’ve heard coming out of China are particularly favorable to exports.
gaius: isn’t this where the fed monetizes everything it takes to keep the ten-year below 3.5%?
I don’t think it matters much. The trouble right now is that the financial markets are so broken that no one is really responding to interest rate signals. At this point you can cut long term interest rates and you won’t get much change in private lending, which is also a good thing because if interest rates increase there won’t be much of a change in the volume of lending.
This also is why the standard argument against the stimulus package is wrong. The idea is that there is a fixed amount of lending and that if the government increasing borrowing then there will be less private borrowing, so the stimulus does nothing except increase public debt.
The argument would be correct if we had functioning financial markets that were already allocating capital to maximize efficiency, but we don’t. The markets (particularly the securitization markets) are broken and are simply not responding to interest rate signals. From an interest rate point of view it makes no sense for people to be buying massive amounts of T-bills, but they still are.
London FT correction about China PBoC continued purchasing of US Treasury bonds:
Following a report in the Financial Times, Luo Ping, a senior official at the China Banking Regulatory Commission, issued a clarification pointing out that buying US bonds is not the only option available to China for investing its foreign exchange reserves.
In an earlier Financial Times report on February 12, Luo Ping was quoted as saying: “China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its ‘only option’ in a perilous world.”
Luo clarified the report later the same day, pointing out that buying US treasuries is in fact one of the options available to China, which can also purchase gold and securities issued by other countries and regions to protect the value of its foreign investments.
“If the U.S. issues too many bonds to prop up its ailing economy, the holders will suffer substantial losses,” he said.
In fact, China’s own needs, and the country’s target of securing the value of its foreign reserves, will be the determining factors in the decision to buy any future bond issues, and the numbers bought.
(China.org.cn by He Shan, February 13, 2009)
I have some new ideas for you
Throw larry out the front door and have tim lip read volcker in front of the cameras. Then Ben- it s your time. You ve eroded the independent FED consensus away to a critical level here. You ve had your chance but blew it spectacularly! Hence you re days have been numbered. But it is not nationalization that does it. It is the high fraud, the good banks and nationalization of FED that do. However you don t re-stuff it with politicians much less with their “independent economic advisers”. So here s my question to you – do you have the “man power” or not?
Then re-audit your gold in the vault cause “the market” really wants more. IMF being the appetizer here in its pre-funeral party.
Got more?
China’s Economy Shows Signs of Recovery on $585 billion Stimulus
Feb. 13 (Bloomberg) — China’s economy is showing signs that a 4 trillion yuan ($585 billion) stimulus package is taking effect.
The world’s third-biggest economy may expand 6.6 percent in the second quarter after slowing to 6.3 percent in the three months to March 31, the weakest pace since 1999, according to the median estimates of 14 economists surveyed by Bloomberg News.
“China looks set to be the first major economy to recover from the current global meltdown,” said Lu Ting, an economist with Merrill Lynch & Co. in Hong Kong. “China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse.
http://www.bloomberg.com/apps/news?pid=20601089&sid=ackHHxtWoFHc&refer=china
chaingangcharlie
china buys imports for its own use as well as for reexport. as of now, the fall in china’s imports exceeds the fall in china’s exports. remember the domestic side of China’s economy has slowed as well. a bigger trade surplus (gap between exports and imports) means more money to invest abroad.
Twofish: “This also is why the standard argument against the stimulus package is wrong.”
Here’s my argument against the stimulus. We’re creating money out of thin air and handing it out and few seem to have a problem with this. Our culture has lost the connection between earning and spending. I can’t emphasize that enough. We’ve become a nation of schizophrenics, living in a world of make believe where we spend things that do not in fact exist.
It’s not about the stimulus or the money, it’s all about the culture. This is not going to end well.
Menomnon: “The central job is to print yuan and use these to buy dollars each day so as to maintain a fixed (and low) rate within a changing forex regime.”
Thanks for posting this. I think I finally get it. What I think this says is that as we print money, the Chinese have to print money, otherwise their currency increases in value. They’ve manacled themselves to a profligate spendthrift and now they don’t know what else to do but print yuan.
Is that right?
Prof. Sester:
I read that the US Treasury will need to issue about $2 trillion of debt this year, vs $880 billion last year. Is there enough buying power out there to soak up these $2 trillion issuance given that export and commodities driven economies will have less foreign reserve build up this year? We have already seen German Bund auction in trouble. So what’s the likely outcome if there is not enough demand for the treasury? The Fed does not want interest rate to spiral up…so does it step in to buy the treasury? Does it then flood the system with dollars and drive up inflation even in the presence of capacity under-utilization in most industries? So we get into an ugly world of stagflation? While this situation should drive greenback lower, given other majoer currencies (euro and yen) also have structural issues, does it mean that the dollar can probably hold against euro and Yen while commodities prices soar up later in the year? I am interested in your view. Thanks.
J
chaingangcharlie:
I have the same reservations you do about Brad’s theory. It could work that way but depends on some idealized assumptions:
1)Prices do not fall in a recession, so margins really do increases as input costs drop.
2) Fixed cost of overhead does not increase faster than input costs drop, as sales volume drops off.
3)At consumer level (or worker level as they are called in China), income does not fall so lower food and gas prices result in more discretionary income.
4) Chinese business and savers have the same zeal for buying treasuries as the Chinese government. (right now a lot of westerners would like to buy yuan, I think.)
So if all these assumptions hold up, then I agree with Brad’s scenario.
Also, that our data is in sync. Prices on commodity imports are “sticky” for a while due to futures market pricing and inventory. But then there is a demand mismatch between orders of new input materials and shipments of products due to manufacturing and order leadtime.
So we might need a few more months of data to see where this may stabilize.
JC — if you take into account the treasuries the fed sold to finance its lending to the banks, the bonds sold for the TARP, the bills sold to provide the fed with more financial firepower and the budget deficit, the us sold $1.6 trillion in bonds (new bonds + bonds from its inventory in the central bank) in 08. the 09 financing requirement is huge, but the shocks in the system also have been huge; i believe the demand will be there as savings rises and private ivnestment falls. the issue is price.
KCat:
That’s right. When a Chinese company gets paid in dollars they deposit them a chinese bank and get credited in yuan. The chinese bank then trades dollars for newly created yaun from the central bank. The central bank buys treasuries to maintain a dollar peg.
This is of course inflationary in the local economy and all countries that peg to the dollar have the same problem(ie middle east).
So they “sterilize”. This is done by issuing bonds or raising bank reserve requirements to take cash out of circulation. They seem to have various degrees of success with this.
bsetser:
“china buys imports for its own use as well as for reexport. as of now, the fall in china’s imports
exceeds the fall in china’s exports.”
Yes. But the operative phrase is ‘as of now’.
If I run a shop, and sales go down, I maybe don’t bother ordering the usual ‘next month’s worth of
stock’ because I’m not going to need it. I just run down my stocks, for that one month.
So that’s one huge outlay ( this month ) off my balance sheet.
So, given I still I have a few sales, my profit figures can look even better than usual, for *that
one month*. But that’s just a one off side effect of the adjustment process.
It’s temporary.
” remember the domestic side of China’s economy has slowed as well. a bigger trade surplus (gap
between exports and imports) means more money to invest abroad”.
To follow through with that reasoning, if China’s exports had died completely, then China could
could cut export related imports *completely*, and ( yippeee !!) make an even bigger surplus of
dollars, the way you tell it.
In the long run, China can only export ( to T Bills) the dollars it imports ( via sales of goods in
US) .
If it imports less dollars, it must, eventually, export less dollars.
Your miraculous Increasing Chinese Surplus Dollars cannot, it seems to me, be a lasting phenomenon.
But then, economics was never my strong point. Anyone ?
“The Plaza Accord was in September 1985.”
Yes, you’re right. I stand corrected.
The point though was that once they adjusted the currencies, the trade deficit disappeared.
With Europe; E Asia was another story.
Actually, Saudi Arabia may already be selling some of its existing assets. foreign assets fell in December (even stripping out valuation effects)
locococo,
I am not sure whether your comment about the US gold (”re-audit your gold in the vault cause the market really wants more”) was rhetorical, but I have suggested that, especially when the US authorities have been switching treasuries for riskier investments, they should be selling some of their gold: http://reservedplace.blogspot.com/2008/12/us-economic-policy-shot-in-foot-3-gold.html
The fact that they are not may say something about how confident the US authorities really are about the outcome of their aggressive stimulus.
Cedric, thanks for that last bit. I now have a basic understanding of sterilization. You da man!
cedric “That’s right. When a Chinese company gets paid in dollars they deposit them a chinese bank and get credited in yuan. The chinese bank then trades dollars for newly created yaun from the central bank. The central bank buys treasuries to maintain a dollar peg.”
well someone correct me if I’m wrong, but you can’t buy treasuries to maintain the dollar peg.
You have to go directly onto forex markets (presumably every day in the case of the PBoC) and buy _dollars_. (w yuan – much of it, one assumes, is newly printed).
You can invest these (without much return these days) in treasuries so that you don’t have vast quantities of unused cash sitting around. Of course you could invest in a variety of things, but US treasuries are usually considered safe.
Chaingangcharlie: “In a nutshell , even if China really really wanted to keep buying US treasuries at the usual rate, it would concievably not be able to, because there simply will not be enough dollars coming in ?”
China can buy U.S. Treasury bills merely by printing yuan. It doesn’t need to run a trade surplus first. The Treasury bill purchase will create the surplus, unless it is offset by a private capital inflow. Any country can debase its currency, and faces no resource constraint in so doing – the only constraint is that it might ignite inflation.
Twofish: We will see if Asian reserves actually decline in the coming months. My guess is, they won’t. And if the U.S. stimulus starts to bring back U.S. demand, the Asian surpluses will rise.
@don:
“China can buy U.S. Treasury bills merely by printing yuan.”
Well, by the same token, Iceland can buy US Treasury bills merely by printing Krona. But it’s not a process that is going to provide much relief to The Bail Out Team, as far as I can see.
By your token, ( which may be indeed be the correct token, I don’;t claim to know) my hypothetical Icelandic Treasury purchase will also ‘create a surplus’.
But the process merely further devalues the yuan / krona and is clearly not going to provide a long term stream of US Treasury funding.
So I am back to my original question, which I don;t think has been answered by anyone thus far :
The only possible source for the dollars with which the Chinese are to (hypothetically) continue buying gross amounts of US T bills is… the US. But if Chinese sales of goods to US protagonists no
longer generates the spare dollars-in-China it once did, what other possible source is there ,for the Chinese, of US dollars to continue this funding ?
Brad says, well, their exports have fallen away but, because their IMPORTS have fallen too, the
Chinese actually now have MORE surplus dollars to throw around. Which leads me to think that, by that token, if their exports failed altogether – leading to an even more dramatic decrease in spending on imports – they would presumably find themselves with EVEN MORE of a miraculous dollar surplus. But that is obviously absurd, in any but the shortest term.
I can see how the process of adjusting to the new ‘lower export’ reality could lead to a temporary rise in this surplus, due to running down of inventory, etc. But – on the principle that in the long run you can’t get more lemonade out a glass than you pour into it, I don’t see that that situation can possibly continue for too long.
My whole original point was that US govt spending has been ( in part) heavily financed for years by US consumer spending on Chinese / Japanese (etc etc) goods. ( In that the dollars spent always wind their way back to the US treasury for recycling.)
This (heavily US-beneficial) cycling of dollars is – medium , long term – going to be scaled back, no ?
chaingangcharlie:
“The only possible source for the dollars with which the Chinese are to (hypothetically) continue buying gross amounts of US T bills is… the US. But if Chinese sales of goods to US protagonists no
longer generates the spare dollars-in-China it once did, what other possible source is there ,for the Chinese, of US dollars to continue this funding ?”
This is and interesting point. It reminded that there are a lot of surplus dollars floating around the world (eurodollars, petrodollars) and chinese manufacturers could accept payment in dollars from other countries they export to. Then the PBoC would still end up with a lot of dollars even tho the trade surplus dropped with the US.
But that is hypothetical.
menomnon:” well someone correct me if I’m wrong, but you can’t buy treasuries to maintain the dollar peg.You have to go directly onto forex markets (presumably every day in the case of the PBoC) and buy _dollars_. (w yuan – much of it, one assumes, is newly printed).
The PBoC ends up with dollars because they buy them in yuan from the chinese banking system, which got them as deposits from chinese companies accepting payment in dollars. So they buy treasuries with dollars they have. This way they don’t sell them in Forex, which would weaken the dollar.