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Brad Setser: Follow the Money

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The US March trade data …

by Brad Setser
May 12, 2009

The March US trade data can be spun many ways. Imports and exports continue to be down substantially relative to last year. The smaller y/y decline in March than in February is a function of the fact that both imports and exports were unusually weak in March 2008 — which improves the base — rather that a rebound in volumes this year. But the pace of decline also does seems to have stabilized.

Broadly speaking — after taking account the effect of last year’s weak base in March — nominal non-oil goods imports are down around 25% — and real goods imports are down around 20% y/y. Nominal non-oil goods exports are down around 20%, and real goods exports are down by between 15 and 20%. Adding services to the picture doesn’t change the story much. The fall in non-oil imports has exceeded the fall in non-oil exports.

That means that the nominal non-oil balance has improved even as overall trade has contracted. The non-petrol goods deficit was 23.1 billion in March — up ever so slightly from the $22.8 billion deficit in February. But the non-petrol deficit was around $37 billion this time last year. That is a substantial improvement.

And the petrol deficit is obviously way down.

That means, among other things, that the US is importing far less savings from the rest of the world — remember, the trade deficit is a good proxy for the total sum the US is borrowing from the world — than it was a year ago even though the fiscal deficit has gone way up. In other words, the rise in private savings and fall in private investment — and thus the change in the private sector’s net balance — has been bigger than the rise in the fiscal deficit.

There is a bit of evidence that the improvement in the trade deficit is close to ending. Calculated Risk’s charts show that the non-oil deficit has stabilzied. The (small) rebound in oil prices means that the petrol bill will soon head up a bit. And if the fiscal stimulus drags up overall US demand, US imports should start rising. If US exports don’t also bounce back, that would imply that the deficit would start to rise as well.

For now, though, the data show that both real imports and real exports have stabilized at much lower levels than a year ago — and that the fall in real imports was bigger than the fall in real exports, generating an improvement in the real trade deficit.

If nothing changes — or if real imports and real exports start to head up in parallel — the improvement in the trade balance will be sustained.

There is also an interesting story — or rather an interesting set of stories — in the bilateral trade data.

Consider three Asian economies.

US imports from China are down 11% in the first quarter, i.e. the fall in US imports from China has been substantially smaller than the overall fall in US non-oil imports. US exports from China by contrast are down nearly 20%. That just doesn’t come through though in reporting that tries to argue that China’s stimulus is spurring activity in the US. Given the huge gap between the amount the US imports from China and the amount the US exports to China, China will need to do a lot more — and import a ton more — to pull the US up.* On the other hand, the bigger percentage fall in US exports to China hasn’t translated into a growing bilateral deficit (comparing q1 09 to q1 08) because the fall in imports is coming from a much larger base. The only goods news is that the y/y fall in US exports to China in March (5.5%) was substantially smaller than the y/y fall in January and February — but then again so was the y/y fall in US imports from China (12.3% in March).

US imports from Korea are down 22.9% in the first quarter (20.5% for March) but US exports to Korea are down more — 39% in the first quarter and 36% in March. There too the trade balance isn’t improving.

US imports from Japan by contrast are down 41.8% in the first quarter (and 46% in March). US exports are down a comparatively modest 22.9% in the first quarter (and 20.5% in March).

That is a big reason why Japan’s global surplus has fallen — and why the US global surplus has fallen. In this case, the bilateral data with the US and the global data tell a similar story; Japan’s surplus overall surplus has fallen while China’s surplus has stayed roughly constant (it was up a bit in q4, but the April 09 surplus is roughly equal to the April 08 surplus).

US imports from the Eurozone are also down by more (24.6% in the first quarter) than US exports to the Eurozone (22.6% in the first quarter).** The US should send special thanks to France — US exports to France were essentially flat in the first quarter of 2009, while US imports from France were down 20%.

On other interesting tidbit. Lower oil prices haven’t translated into higher oil demand. Prices in 2009 are about half their level at this time in 2008. But total imports — in volume terms — are still down by almost 5% in the first quarter.

There has been a lot of talk about how the US now sees eye-to-eye with China but not Europe on the need for stimulus. Yet in a lot of ways, the data suggests that the need for further adjustment in the Sino-American trading relationship still remains much larger than the need for further adjustment in the European-American trading relationship — in part because a long period of dollar weakness against the euro really did bring the US deficit with Europe down, and in part because Europe’s automatic stabilizers should help to soften the amplitude of the downturn in European demand.

Then again, the impact of different policy responses will be felt more going forward — and the April data from China provided a bit of good news, namely that the contraction in China’s imports looks to have ended before the contraction in China’s exports. That is good news for the world – as it implies that China’s growth is being driven by domestic demand now, not by exports.

* China’s stimulus also can impact the US indirectly, as say Brazil exports more to China and then imports more from the US.
** The March data isn’t much different. Exports are down 20.9% y/y while imports are down 22.6%.

35 Comments

  • Posted by guest

    Cheering to read positive developments on the BOT BOP and to know that the culprits are not Smoot-Hawley.
    The General equilibrium will require a rebalancing of many economies at the same time.This is where with or without tariffs, consequences may be still be the same.
    Hoover is said not to have been too ascertive when refering to the above mentioned gentlemen tariff act.

  • Posted by FollowTheMoney

    global imbalances are going into complete chaos. When is the U.S. going to stop borrowing? All this stimulus to try and reflate the bubble is going to cause far more problems in 6-12-18 months out.

    I think I’d like strike the term “BLACK CLOUDS” starting to appear as de-globalization continues month by month. The “Black Clouds” won’t give the Green shoots the shine they need to grow.

    I hate to say but the current admin is building it’s case on hope, and unfortunately hope is not a strategy.

    It is good news that China is seeing some internal consumption drivers appear, but there is also going to be a severe consequence because of this down the line…

  • Posted by bill j

    It does appear though that the re-proportioning of the world economy, the US deficit and the Chinese surplus is ongoing, from Bloomberg today;

    “The drop in overseas shipments was worse than the economists’ forecast for a 15.3 percent decline. Total trade with the U.S. fell 17.1 percent. For the European Union, the decline was 24.1 percent.

    Imports dropped 23 percent, leaving a trade surplus of $13.14 billion, less than the previous month and a year earlier.”
    http://www.bloomberg.com/apps/news?pid=20601089&sid=ahbGMQiuZVQY&refer=china

    Given that the price of Chinas imports with a large proportion of raw materials, has fallen much faster than that of exports I think around -20% for imports to the year to Feb, compared with around -3% for exports, then the physical quantities of China’s imports are pretty much back to their peaks of last year, while that of their exports remains well below them.
    This implies that the Chinese stimulus is working and will provide an ongoing market for world exports this year.

  • Posted by vince

    Brad,

    *i think there are 1 or 2 typo errors in the first paragraph after “Consider the asian economies”

    *Would you have a graph showing your estimation of the bilateral trade deficit with China over a long or medium term period ?

    *Thanks so much for your work and for sharing it.

  • Posted by FollowTheMoney

    @ billj

    it also implies that china may increase capacity to such a large extent that at one point they may flood the market with cheap goods…increasing the global deflationary spiral.

  • Posted by bsetser

    vince — think i corrected the total.

    To do a good estimate of the bilateral deficit you need to adjust the US data for exports to China via HK (or adjust the Chinese data for exports to the US via HK) and I haven’t taken the time to really do an adjustment. The quarterly data though back to 99 is easily available on the US BEA’s webpage (look at the interactive tables, especially table 12)

  • Posted by don

    If the U.S. deficit expands from here, the short-run policies of the administration and the Fed may prove truly disastrous down the road, say in four or five years. But in place of your original fears of a dollar collapse as a result of a decline in demand from Asia, I fear a dollar collapse from rather dramatic U.S. inflation.

  • Posted by bsetser

    bill j –

    the us data on exports to china suggests chinese demand through march was down across the board, i.e. it was not just a function of lower commodity prices.

    agree though that the april data suggests that imports are now falling more slowly than exports — which is one sign of that the stimulus is working. still tho think that imports — even after adjusting for commodity prices and impotrs for re-export — are down a bit.

    I really need to get an import price series for china that i can use to produce an estimate of real imports. any suggestions?

    follow the money — umm, the us is borrowing substantially less from the rest of the world now than in the past. the imbalances have shrunk. maybe not sustainably, but they have shrunk.

  • Posted by FollowTheMoney

    excesses from these imbalances are so great, although they may have shrunk the problem is far from solved. China does not want to appreciate it’s currency, and at the same time continuously warns U.S. policy-makers to protect it’s investment. In my opinion it’s a dis-functional global model and we need to sweep up these imbalances once and for all. The best way to do it would just have direct global depression and then resume growth. Instead we’re now going to have 10 year slow growth period, unless we agree to take the pain “now, over the next 6 months”.

    Additionally

    QE has been used over and over (japan) and it’s really never worked. The U.s. government may have prevented bankruptcy of banks, but now the risk is preventing a default on the U.S. government/debt….

    In my opinion, hope is going to be destroyed, just pay attention to the black clouds.

  • Posted by DJC.

    In laymans terms: We are in a severe recession, so everyone is shopping at Walmart to save money. Since everything you buy at Walmart is made in China, you basically send all your cash to them in a large suitcase. Now multiply that by millions of Walmart shoppers, sending over millions of suitcases of cash, every hour on the hour. That why the US trade deficit with China rose 10%, to $15.6 billion, in March, the largest gap since January.

  • Posted by Cedric Regula

    DJC:

    I’ll confess to buying a new golf bag at Wal-Mart yesterday. But I only spent $39 on it. So I don’t know what all the other bozos did to get $15.6B to go to China in March.

    But now it’s time to head to the golf course.

    I’ll check back later for the answers.

  • Posted by Twofish

    FollowTheMoney responds: Excesses from these imbalances are so great, although they may have shrunk the problem is far from solved.

    Economics is not about “solving” problems, merely managing them.

    FollowTheMoney responds: In my opinion it’s a dis-functional global model and we need to sweep up these imbalances once and for all.

    Attempts to solve economic problems once and for all tend to end up solving nothing. Complex systems are not engineered, they evolve, and as we lurch from one crisis to the next gradually things improve.

    FollowTheMoney responds: The best way to do it would just have direct global depression and then resume growth.

    If you think that the best we can do is to have a depression, I don’t see why you won’t let those of us that think that we can obvious one, one crack at the wheel first.

    Economic strategies that involve letting things fall apart so that they can come back together again, generally just end up having things fall apart, and they don’t come back together.

    FollowTheMoney responds: Instead we’re now going to have 10 year slow growth period, unless we agree to take the pain “now, over the next 6 months”.

    No. I think we’ll be out of this recession in 12-18 months. The question of whether or not to contract an economy or expand it in a credit collapse was settled in the 1930′s.

    The conventional economic wisdom is that letting things fall apart is exactly what lead to the Great Depression. Off the top of my head, I can’t think of any situations in which “let it all fall apart” has actually worked, which is why no one is trying it.

  • Posted by Twofish

    FollowTheMoney: QE has been used over and over (japan) and it’s really never worked.

    It’s been argued that Japan didn’t cut interest rates far or fast enough.

    But in any case, for every one example, in which you can give me in which QE has failed, I can give you five in which having things fall apart has resulted in worse situations. There ia a reason that most people didn’t take Austrian economics seriously throughout most of the 20th century.

    FollowTheMoney: The U.s. government may have prevented bankruptcy of banks, but now the risk is preventing a default on the U.S. government/debt.

    Which I don’t think is a huge problem. Once things start picking up, you can raise taxes to cool the economy.

    The situation with the economy is like a time bomb that you can only defuse by cutting one wire. At the end of the day, you have to make a decisions which wire to cut, and I think they cut the right one.

  • Posted by Twofish

    FollowTheMoney: I hate to say but the current admin is building it’s case on hope, and unfortunately hope is not a strategy.

    It actually is. Economics involves pretty basic human emotions (usually some combination of greed and fear), and getting hope and trust back into the system is a pretty important and in fact I would argue that in the current situation, the most important part of economic recovery.

    Economic models and policies that ignore the human element just won’t work.

  • Posted by Twofish

    One other thing which was an important factor in the case of Japan is that many people and in fact probably most people would much rather have a period of sustained but slow growth over a depression followed by a boom and certainly would prefer a stagnant economy over a certain depression followed by a vague promise of a boom.

    Personally having been burned before by Marxism and anti-Marxism, if you say that we have to go through hell to get to the promised land, I just don’t believe you because Mao promised that before, and what people ended up with was just hell.

    People that willingly embrace economic disaster are just too ideologically certain for me to trust.

  • Posted by bsetser

    “The conventional economic wisdom is that letting things fall apart is exactly what lead to the Great Depression. Off the top of my head, I can’t think of any situations in which “let it all fall apart” has actually worked, which is why no one is trying it.”

    I agree with twofish here –

    Concretely, letting things fall apart would mean us output falls more than the 3% it fell over the last 2 quarters, and US imports fall by more than the 20% (real)/ 25% (nominal) that they have fallen y/y.

    subject the current system to that kind of strain, and there is no telling what you get.

    oh, presumably letting the system fall apart would also mean letting banks fail, i.e. deposit freezes and the like, rather than having the government step in. and past experience suggests that is a very good way to get a much much bigger fall in output than we have seen.

  • Posted by don

    Agree with most of FollowTheMoney’s pessimistic view. I disagree that we will be out of this recession in 12 to 18 months. And I disagree strongly that the current policies towards banks are anything but disastrous. Too much of the bad loans are being foisted onto to taxpayers. I don’t object to the wealth redistribution aspect of these policies, but to the limits they will place on government actions going forward – preventing inflation, having sufficient funds for stimulus, and preventing tax burdens from damaging incentives.

  • Posted by Twofish

    don: I disagree that we will be out of this recession in 12 to 18 months.

    It’s not worth arguing about this right now, since we can wait 3 to 6 months to see how things go. The one thing to note is that things are according to plan. If you were to ask most people what things would be like it the stimulus worked, it would look more or less like it does now.

    don: Too much of the bad loans are being foisted onto to taxpayers.

    Which taxpayers? Personally, I don’t see anything wrong with people making over $1M bear most the burden for the clean up. After all, a lot of them contributed to the mess.

    don: I don’t object to the wealth redistribution aspect of these policies, but to the limits they will place on government actions going forward – preventing inflation, having sufficient funds for stimulus, and preventing tax burdens from damaging incentives.

    Yes this causes a lot of problems, but its nowhere near the problems that you get into if you don’t do anything. It’s not a choice between paying and not paying. It’s a matter of deciding who pays, and I really don’t see what is objectionable about having having people making more than $1M contribute to clean up fund.

    And it’s also not much of a choice. If you don’t revive the economy, then tax receipts are doing to go down and you end up in a death spiral. I don’t know off hand of any economy that budget cut its way out of a recession.

    If the 1980′s and the 1940′s are any guide, we are likely to be spending the next ten years or so paying down the stimulus, at which point people will forget about this experience and do all of the stupid things all over again.

    It’s a choice between a bad policy and a one that was totally disastrous the last time it was tried. I go for the bad policy.

  • Posted by don

    2fish: “Personally, I don’t see anything wrong with people making over $1M bear most the burden for the clean up. After all, a lot of them contributed to the mess.”
    Me either. But I doubt very much if that is how things will pan out.

    2fish: “Yes this [bank bailouts] causes a lot of problems, but its nowhere near the problems that you get into if you don’t do anything. It’s not a choice between paying and not paying. It’s a matter of deciding who pays, and I really don’t see what is objectionable about having having people making more than $1M contribute to clean up fund.”
    My point is that the bailouts and the consequent movement of liability for bad loans to the public sector is counterproductive. Stiglitz (for one) agrees – federal deficits for bailouts provide little stimulus and displace spending that would provide stimulus. Fama also agrees – the bank holding companies should be forced into receivership, with lenders (other than FDIC insuired deposits) taking the loss.
    One important factor that is missing in the debate is that there are very substantial efficiency costs to public funds. It is not merely a transfer from taxpayers to government. Furthermore, the cost of the transfer increases geometrically with a linear increase in size and is much greater if accomplished with a graduated income tax as opposed to a flat tax.

  • Posted by DOR

    Why should US imports from China contract more slowly than imports in general? Substitution. China is being substituted for imports from other manufacturers-for-export.

    Over the past 10 years, imports from China expanded 18.7% p.a., those from Brazil 7.7% p.a., Mexico 7.4%. Imports from Hong Kong and Singapore contracted while those from Japan, Korea and Taiwan rose 1.1%, 7.6% and 1.5% p.a., respectively. Over five years, the trend is even more pronounced.

    .

    FollowTheMoney,
    It is much, much too early to worry about building the next bubble when the economy is still contracting. “Hope” may not be much of a strategy, but it leads to confidence which leads to consumption and investment.
    The 1990s Japanese strategy didn’t work, remember? And, the notion of inducing a global depression is frankly immoral. Millions would die, unnecessarily, just to boost growth a bit.

  • Posted by FollowTheMoney

    Twofish & Bset-

    Delighted to hear your feedback. Granted i’m a recent undergraduate I’m open to critique. I’m sure my analysis I make rookie mistakes, but like to express my opinion.

    My view stands with the Austrian school. I think we need to clean out the imbalances. Let the guys fail who made mistakes, and then let the bankruptcy courts settle the score.

    One quick point i do want to make is, can the 3 of us just look at the photo 10 years out instead of focusing over the next 2 years???

    Option 1

    -The immense spending and borrowing, spend and borrow of trying to reflate a bubble that will not reflate will ultimately cause immense burden on future taxpayers. Think of what your children and there children will live upon? Think about the burden of immense debt? And more importantly think about the even greater debt should the “hope” fail. Generations will have increased tax rates in the United States that will lower our standard of living.
    It is my belief that it will be very difficult for many Americans to see there standard of living decline vs. emerging countries (BRIC nations), i think research shows that China/Brazil/Russia/India will have far lower tax brackets after this crisis. Point being it’s this transition, of socializing failures i do not see going over well with the majority of Americans.
    And why should future generations be forced to pay the price of the executives (who will probably retire anyway) who made the mistakes?

    Now option 2. Take the pain NOW not LATER.

    Ok say we come to agreement that we let failures fail. Sure we have a few years of immense pain, but you know what? This is the United States of America, we’re going to come out stronger than ever. We’re going to come out stronger because we wont need the immense tax on capital (and yes 2Fish it’s those making above 1M that put capital into the markets). Yes the world will have a difficult few years, but we maintain an attractive capital for the world of finance.

    Again, maybe i’m just upset seeing such a great country continue to borrow borrow borrow and then try and reflate things with spend spend spend.

    Call me ole school, but the key in life is moderation and balance. We have lived beyond our means, in more ways than one. The United States of America should just take 2 years of pain, instead of 20 years on Tylenol. The government should leave the patient alone.

    I maybe young, but confident we’ll be much better if she stay out of the market. Unfortunately it maybe too late, and if things don’t work as planned there is no question we will see a severe currency crisis, and perhaps foreigners who think twice about working and investing in a country who’s status was once the ‘land of opportunity’.

  • Posted by Too Much Fed

    Request!

    When someone mistypes the addition question, find some way to keep their comment. I’m not retyping it.

  • Posted by Twofish

    FollowTheMoney: My view stands with the Austrian school.

    My view stands with the “whatever the hell works” school.

    The problem with the Austrian school’s explanation of credit busts is that most people think that is was totally discredited in 1929, and their explanation of how a credit bust works just doesn’t seem to match what I’m seeing. I don’t see people continuing to loan massive amounts of money to subprime real estate. I see people running for the exits and taking money out of things that should be funded.

    FollowTheMoney: he immense spending and borrowing, spend and borrow of trying to reflate a bubble that will not reflate will ultimately cause immense burden on future taxpayers.

    Right now we are looking at 60-70% GDP. If things go according to plan, then once economic growth restarts, that will be plenty to cover the current debts. And the economy is reflating.

    FollowTheMoney: And why should future generations be forced to pay the price of the executives (who will probably retire anyway) who made the mistakes?

    Because many of them will have inherited their money from those same executives. Most rich people get their money through birth, luck, or social connections. If you aren’t born into the right family, your odds of making $1M a year are quite low.

    FollowTheMoney: Ok say we come to agreement that we let failures fail.

    Sure we let the failures fail. That’s why I think it’s better to call this a clean up rather than a bail out. Suppose we have a bank that is failing or near failure, now what? Well, we need to go through some process that looks like bankruptcy.

    So what does a bankruptcy look like. Suppose you have a company that files for Chapter 11. The very, very first thing that happens it that someone comes in and dumps massive amounts of cash on that company to keep it running while people figure out what to do next. The second Lehman declared bankruptcy, it got a $15 billion loan.

    The problem with the banking is that normally when a company goes bankrupt, the money is provided by a bank, which leaves a problem of what happens when a bank goes bankrupt or near bankrupt.

    Dealing with a bankrupt company is a frighteningly complex, messy, and expensive process. You just can’t walk away. In the banks, the only institution that has the cash to clear out the mess is the government.

    FollowTheMoney: We’re going to come out stronger because we wont need the immense tax on capital (and yes 2Fish it’s those making above 1M that put capital into the markets).

    1) It’s actually not. Most capital comes from the middle class. Taxes come from the rich. Which is why I’ve always been puzzled by how middle class people talk about “taxpayer funded bailouts of the banks” as if it was a bad thing, when it is clearly in their financial interest to have that happen.

    2) People rich or poor are not going to end up putting money into markets that aren’t well regulated.

    FollowTheMoney: I maybe young, but confident we’ll be much better if she stay out of the market.

    One thing that amazes me about all of this is how people who tend to “market idolatry” are people that have the least real experience and contact with markets.

  • Posted by a

    2Fish: “If you were to ask most people what things would be like it the stimulus worked, it would look more or less like it does now.”

    And if you asked most people what things would be like if stimulus wasn’t working, they would say that it would look more or less like it does now – California sales tax receipts off 50%, budget deficits skyrocketing with no end in sight, beginnings of movements to sharply increase taxes (which should produce a big second-leg down).

    2Fish: “My view stands with the “whatever the hell works” school.”

    No it doesn’t. Your view stands with whatever the Hell helps Wall Street. You dress your thoughts up, but you apparently don’t have the self-reflexivity to realize that what you are proposing coincides with what helps you (Wall Street) the most – do you really think that what is best for the country just happens to be what is best for Wall Street?

    2Fish: “It’s not worth arguing about this right now, since we can wait 3 to 6 months to see how things go.”

    Funny, I remember you mentioning 6 months several months ago. Anyway, that was a short timeframe then, and it’s still short now. As I understand it, both the Fed and the US Treasury are injecting massive amounts into the economy and are planning to do so through 2010, which takes us far longer than 6 months. So conceivably the economy may be supported a couple of years.

    2Fish: “The conventional economic wisdom is that letting things fall apart is exactly what lead to the Great Depression.”

    Conventional economic wisdom has pretty much been shown to be a pile of crap.

    “Off the top of my head, I can’t think of any situations in which “let it all fall apart” has actually worked, which is why no one is trying it.”

    Off the top of my head I don’t know any instances of letting it all “fall apart”. You cite the Depression, but in fact Hoover did try things. And the Great Depression was a pretty mild example anyway of things “falling apart”. It’s almost a universal truth that the elite in any country will protect their interests and therefore try to stop things from “falling apart”. They will borrow and steal and talk high-mindedly of what they are doing, until they can’t borrow and steal any more – and then things will *really* fall apart. And then things may not turn out so bad, economically speaking. The French Revolution comes to mind – after less than a decade, the French economy had recovered enough to take on Europe. There were non-economic consequences of taking things to the brink, the Terror and so forth, but that’s a gamble you seem willing to take.

    Your reasoning is basically let’s shoot the works because there is no difference between how things fall apart. If the plan doesn’t work, things fall apart; and if the plan isn’t tried, things fall apart. This is terribly, terribly wrong. The U.S. got through the Great Depression; it was difficult, but it pulled through. Bankruptcy by the U.S. government could well destroy the U.S. political system. You can’t conceive of that possibility, so you’re willing to roll the dice. It may not happen, but the probability is non-zero and IMHO high enough to say that your approach is the wrong one.

  • Posted by Brick

    There is some evidence that China has curtailed some of the recent bank lending in China, and that the Chinese stimulus has often found unproductive avenues to follow. Stock piling of some resources and repairs after the earthquake are also confusing the data, so I am not convinced of any sort of short term turn around in the Chinese economy.

    It would be interesting to compare port data for the US against the export and import figures because the ones I have looked at are showing some stabilisation in import loads but export loads are beginning to decrease. Your argument that both imports and exports are levelling off may be questionable.

    What I do see from the data is that Canada and Mexico got absolutely shafted by the US. They continued to buy from the US while the US stopped buying from them. Imports from Canada down 37 percent while exports only down 27 percent and the funny thing is the Canadian export import data to the US does not match up the US data exactly.

    I think we can expect some turbulence in the export data to Mexico with the recent flu event which will catch a few by surprise and with pension problems in Canada we should not expect exports to Canada to hold up in the way they have been.

  • Posted by Twofish

    a: Do you really think that what is best for the country just happens to be what is best for Wall Street?

    Yes. In fact, I do. If I didn’t state that explicitly before, I’m stating that explicitly now. There are certainly conflicts of interest, but they are minor in the grand scheme of things.

    Personally, I think that if you have a competent bank CEO, that they deserve a $15M/year salary and bonus. The trouble is that we had some pretty incompetent people getting that sort of money.

    Basically if you think that the financial industry consists of nothing but blood sucking parasites that do nothing useful, then we need to discuss that issue first. One reason that I got into business and markets was that when Mao went in and shot the bankers, it put China in a bad situation that took several decades to recover from.

    We can argue the point as to whether this is true or not, but I believe that for the most part what is good for Wall Street is good for the global economy and vice versa. Bad banks and bogus mortgages are not good for either. High taxes and strong regulation are good for both. Also what is good for a particular CEO in a particular isn’t necessarily good for the financial industry or for the United States. It’s bad for Wall Street when CEO’s and top executives aren’t taxed enough, and get incentivized to do the wrong things.

    a: As I understand it, both the Fed and the US Treasury are injecting massive amounts into the economy and are planning to do so through 2010, which takes us far longer than 6 months. So conceivably the economy may be supported a couple of years.

    Great!!! This gives us enough time to deal with the structural issues. Medicare is going to be bankrupt by 2017 and Social Security by 2040. If you stabilize things, this gives about two to three years to figure out what to do about this. It’s going to involve raising taxes and cutting benefits.

    a: It’s almost a universal truth that the elite in any country will protect their interests and therefore try to stop things from “falling apart”.

    Absolutely.

    In the long run, people tend to protect their own interests. However getting rid of an elite doesn’t deal with the issue since you end up with a *new* elite that tries to rob and steal and get things their own way. What you need to do is to align the interests of the elite with the interests of the masses. Hard to do, but the US has done it pretty well.

    Also, periods of political and financial chaos tends to create new elites that are usually nastier than the old ones. In your vision of the world, who will be the new elites?

    a: They will borrow and steal and talk high-mindedly of what they are doing, until they can’t borrow and steal any more – and then things will *really* fall apart.

    Unless they are total idiots (which happens sometimes), why would they do that? If you take too much you end up with nothing. Often what happens is that the people in power look at the crowd outside and ask them what they want to go away, and then throw enough money at the crowd so that they are happen.

    Which is why I really want to get employment up and the economy working. If you have angry people out there, I’m not going to be making large sums of money. If we get the economy back on track, then no one is going to care how much money I make. Same thing with high taxes. I don’t make $1M/year but some day I might, and if someone complains, I can point out that I’m paying for their health care and education.

    a: Your reasoning is basically let’s shoot the works because there is no difference between how things fall apart. If the plan doesn’t work, things fall apart; and if the plan isn’t tried, things fall apart.

    My reasoning is that we have a plan that is supposed to fix things without letting everything destroy itself, and we should try that first.

    The difference between my approach and yours and FollowTheMoney’s is that I can list ten things that are wrong with my approach and fifteen reasons why it might not work.

    a: Bankruptcy by the U.S. government could well destroy the U.S. political system. You can’t conceive of that possibility, so you’re willing to roll the dice.

    We are talking about a debt that is 60-70% GDP, that’s not nearly at alarm levels. The problem with a lot of these discussions is that you need to talk numbers. It makes a big difference if at the end of this we are looking at 70% debt/GDP or 200%. Similarly it make a huge difference if we are talking about 40% marginal tax rates or 90%. When people talk about “high taxes” and “big debts” you have to put a number otherwise the discussion is sort of meaningless.

    a: It may not happen, but the probability is non-zero and IMHO high enough to say that your approach is the wrong one.

    My approach is a bad one. Do you have anything better?

  • Posted by Twofish

    Canada and Mexico are interesting case studies, because Canada seems to be an example of how to structure a banking system while Mexico is an example of how not to structure a banking system.

    Mexico is a cautionary tale because in the 1970′s people talked about a “Mexican miracle” and it fell apart in 1982 and Mexico still hasn’t recovered.

  • Posted by a

    “Unless they are total idiots (which happens sometimes), why would they do that?”

    Why do they have to be total idiots? It’s absolutely normal to base your beliefs on recent experiences. If for 50 or even 25 years things have worked a certain way, then you begin to think there is some necessity that it should always be like that. They’re wrong but they are not idiots.

    “My reasoning is that we have a plan that is supposed to fix things without letting everything destroy itself, and we should try that first.”

    No, that’s wrong. Again you are simply glibly using “destroy itself” when they are degrees of destruction. Suppose that the US stops borrowing in two years because it can’t borrow any more but doesn’t default. And suppose that this economic downturn goes on for five years. I claim your strategy of trying something – and spending lots of money now – will lead to more people having worse lives in two to five years. It’s not simply – as you are trying to present it – heads you win, tails you’re flat. It’s heads you win, tails we lose. Afterwards, of course, are the probabilities of those two events; but at the moment I’m afraid you don’t even consider the eventuality that your strategy can make things worse than they otherwise would be.

    “We are talking about a debt that is 60-70% GDP, that’s not nearly at alarm levels.”

    We’ve been through this already. I think you are underestimating the real debt level.

    “My approach is a bad one. Do you have anything better?”

    I think this is false modesty. Sure all plans are bad. But do you agree that your approach could make things worse compared to other plans, 2-5 years down the road, and in fact be catastrophically worse?

  • Posted by don

    Brick -
    Do the U.S. data for trade with Canada and Mexico that you cite include oil exports?

    Too Much Fed –
    When you type your entry, use the ‘cut’ option to save it temporarily. If it isn’t taken (the addition check fails or expires before you make the entry), you can just ‘paste’ it back in and retry.

  • Posted by don

    Too Much Fed
    Sorry – I meant to say use the ‘copy’ option, not the ‘cut’ option.

  • Posted by Too Much Fed

    don, thanks I will try that.

  • Posted by Twofish

    a: Why do they have to be total idiots? It’s absolutely normal to base your beliefs on recent experiences.

    It’s also stupid and idiotic. Anyone with a decent education shouldn’t look at the last 5 or 50 years of human experience but the last 5000.

    a: Suppose that the US stops borrowing in two years because it can’t borrow any more but doesn’t default. And suppose that this economic downturn goes on for five years. I claim your strategy of trying something – and spending lots of money now – will lead to more people having worse lives in two to five years.

    If this recession goes on for more than a year, then I’m obviously wrong about what is going on, at that point we step back and do something different. If I’m right about what is going on, this downturn won’t last for five years.

    a: I’m afraid you don’t even consider the eventuality that your strategy can make things worse than they otherwise would be.

    I’m considering it, but at some point you have to make a decision about what to do. At some point you have to stare at the time bomb, and make a decision about what wire to cut, and just do it.

    The conventional economic wisdom is that the big mistake in 1929 was that Hoover didn’t do what we are doing now, and looking at emerging markets of the 1990′s and financial panics of the 19th century reinforces that idea in my head.

    It might be totally and utterly wrong. Then again, it might be totally and utterly right. You have to make a decision about what to do and what not to do. The Keynesians say flood the economy with cash. The Austrians say do the opposite. You have to make a decision, and I’m siding with the Keynesians. I don’t know if this is a good decision or not, but things are looking better right now.

    Also, it’s a minor miracle that we’ve good this far. Things could have been a lot, lot worse.

    a: I think this is false modesty. Sure all plans are bad. But do you agree that your approach could make things worse compared to other plans, 2-5 years down the road, and in fact be catastrophically worse?

    Absolutely. It could, and Von Mises, Hayek, and Rothbard all say it will. If I thought it would, then I’d be advocating different policies. If the Austrians are right then the policies that I’m supporting would be total disaster. The trouble is that if the Keynesians are right, then what the Austrians suggest is a total disaster.

    Personally, I think Keynes was right and Hayek and von Mises. It’s not that I like Keynes better than von Mises. I think that von Mises got the mechanics of a credit boom absolutely right and why central planning just can’t work, and as far as I know, von Mises was just a nicer person than Keynes was.

    But I think I have very good reasons to think that von Mises just got this wrong, and a lot of these reasons are shared by people that are actually making the decisions. Part of this was that Hayek and Keynes debated this in the 1930′s and Keynes won.

    One of the ironies is that Hayek’s main point was that Keynes was looking at abstract concepts and not looking at the details of how markets work. It’s ironic because I don’t think that current Austrians really have that much contact with real markets.

    This is the ironically one of the reasons I think that the Austrians are getting it wrong, because with Rothbard’s influence Austrian economics has been something of a knee-jerk “government is evil” ideology rather than using methodological individualism to look at how markets function at the micro level.

    The other problem is that there is this weird ideological incoherence among libertarians and Austrians. On the one hand there is this praise and idolatry for the wonders of the market, but then people turn around and spit on the people that are actually working in them.

    Personally, I think that markets, Wall Street, and finance are good things, which is why I voted for Obama.

  • Posted by Too Much Fed

    twofish said: “a: Do you really think that what is best for the country just happens to be what is best for Wall Street?
    Yes. In fact, I do. If I didn’t state that explicitly before, I’m stating that explicitly now. There are certainly conflicts of interest, but they are minor in the grand scheme of things.

    Personally, I think that if you have a competent bank CEO, that they deserve a $15M/year salary and bonus. The trouble is that we had some pretty incompetent people getting that sort of money.”

    I DON’T!!! IMO, no one deserves more than 3 to 5 million a year, ESPECIALLY a bank ceo!

    Producing debt to enrich yourself is NOT productive. Looking at most economic crises, too much debt is usually the problem! Why give someone more salary and/or bonus than they deserve to produce something that can lead to economic crisis?

    I also do NOT want the bankers and the fed exploiting a globally oversupplied labor market to make real earnings growth negative for the lower and middle class and then giving them cheap debt (so they are debt slaves) to make up the difference while collecting interest payments, salary, bonuses, and stock options to enrich themselves and produce more wealth/income inequality.

    Get rid of most of the debt, and get rid of most of the economic problems of the world!

  • Posted by Twofish

    Too Much Fed: Producing debt to enrich yourself is NOT productive. Looking at most economic crises, too much debt is usually the problem!

    Debt is not a problem. It’s who owes who that is. When you deposit money into a savings account, that creates debt. The bank owes you money, and if you look at a bank balance sheet, all of the money that people deposit into bank accounts, is counted as debt and liability.

    So if you encourage people to save money, you are increasing debt. Every cent that you put into a bank account or mutual fund is a cent of debt that the bank or mutual fund owes you. Conversely, every cent that you borrow from the bank is counted as an asset for the bank. So the problem isn’t debt itself, it’s the type of debt and what the debt is used for.

    Too Much Fed: I also do NOT want the bankers and the fed exploiting a globally oversupplied labor market to make real earnings growth negative for the lower and middle class and then giving them cheap debt (so they are debt slaves) to make up the difference while collecting interest payments, salary, bonuses, and stock options to enrich themselves and produce more wealth/income inequality.

    Neither do I, but it’s not an accurate description of what is going on. In particular, most people that work in banks or in finance aren’t hyperwealthy. Bank CEO’s and corporate executives make a ton of money, but so do non-banking CEO’s and corporate executives. Second, most of the money that banks process go to factories and businesses that generate jobs and employment. Finance itself generates a lot of high technology useful employment.

    Part of what frustrates me is that people have this huge and wrong headed into that people on Wall Street right now are just laughing their way silly taking huge amounts of bailout money. I’ve had to deal with 20% layoffs and a 25% salary cut, so I’m in the same boat as everyone else that is worried about losing their job.

    Too Much Fed: Get rid of most of the debt, and get rid of most of the economic problems of the world!

    If you get rid of the debt that the bank owes you, I don’t think you would be too happy about that. If you make it impossible for businesses to raise cash to pay workers, I don’t think this would be a good thing.

    Now if you think that it is a good idea to discourage certain types of debt, then that is a different issue.

  • Posted by a

    2Fish, I think your timebomb metaphor captures your reasoning perfectly. Again, you think there is *one* bad result – things “fall apart” or the “End of the World”. According to your metaphor, there are two wires, and cutting the wrong one, whichever it is, leads to the same result, the same explosion of a unique bomb. This is wrong. There are gradations in all things, including Depressions and economic collapses. To return to your metaphor: if the wire you cut is the wrong one, then it turns out the bomb is nuclear. The full faith and credit of the U.S. goes poof in a very bad way. On the other hand, if the other wire is the wrong one, then the bomb is destructive but in a containable way – government safety nets will contain it.

    2Fish: “If this recession goes on for more than a year, then I’m obviously wrong about what is going on, at that point we step back and do something different.” Let’s hope we have that luxury.

    2Fish: “I’ve had to deal with 20% layoffs and a 25% salary cut, so I’m in the same boat as everyone else that is worried about losing their job.” Except you were paid a lot more while you had a job?

    This thread is getting kinda old. I’ll leave it here.

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