Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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It Has Been a Long Time

by Brad Setser

I stopped blogging almost seven years ago.

My interests have not really changed too much since then. There was a time when I was far more focused on Europe than China. But right now, the uncertainty around China is more compelling to me than the questions that emerge from the euro area’s still-incomplete union.

Some of the crucial issues have not changed. The old imbalances are starting to reappear, at least on the manufacturing side. China’s trade surplus is big once again—even if the recent rise in the goods surplus (from less than $300 billion a couple years back to around $600 billion in 2015) has not been matched by a parallel rise in China’s current account surplus. The U.S. non-petrol deficit is also big, and rising quite fast.

But some big things have also changed.

The United States imports a lot less oil, and pays a lot less for the oil it does import. That has held down the overall U.S. trade deficit.

Oil exporters have been facing a gigantic shock over the last year and a half, one that is putting their (sometimes) considerable fiscal buffers to the test. Even if oil has rebounded a bit, at $50 a barrel the commodity exporting world is hurting.

Looking back to 2006, 2007, and 2008, one of the most surprising things is that Asia’s large surplus coincided with rising oil prices and a large surplus in the major oil exporters. High oil prices, all other things equal, should correlate with a small not a large surplus in Asia.

The global challenge now comes from the combination of large savings surpluses in both Asia and Europe rather than the combination of an Asian surplus and an oil surplus.

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All great things have to end

by Brad Setser

This will be my last blog post, at least for the foreseeable future.

I have accepted a new job, one that will require a certain level of discretion. I am excited by its challenges: ‘Balanced and sustainable” growth is something that I believe in. But suspending this blog is still hard.

I started blogging almost five years ago, back when blogging felt new and the barriers to entry were much lower. I was also lucky: first Nouriel Roubini and RGE and then the CFR were willing to pay me to, at least in part, write a niche blog on global imbalances and global capital flows. The CFR in general – and Richard Haass and Sebastian Mallaby in particular – took a risk (a calculated risk?) that I could maintain a blog with open comments that could live up to the standards of the Council on Foreign Relations.

I started writing a blog almost by default. There wasn’t an obvious source of demand for the kind of work that I wanted to do. My interests were too grounded in current events to fit well with academia, as I neither am a true economist nor a true political scientist. And I was too interested in policy issues to match, consistently, the interests of the market — especially as I am a bit better at seeing risks than opportunities. No private bank keeps a specialist on the TIC data on their payroll.

Plus writing a blog gave me the freedom to write what I wanted when I wanted – and on occasion to work from where I wanted to work.

Over time, I devoted more time to the blog and less to more academic publications than I should have. Blog posts “decay” faster than academic papers. At the same time, all my short-term incentives worked the other way: this blog’s traffic was never was all that high, but it still attracted more readers in an average week than have bought the book I wrote together with Dr. Roubini – and more readers than downloaded the paper I wrote exploring the strategic consequences of relying on foreign governments for financing.

Moreover, there is no other way that my work would have come to the attention of a Nobel Laureate in economics, Berkeley’s economics department (or at least parts of it), a tenured professor of political science, the World Bank’s Beijing office, parts of Deutsche Bank’s research group and the economic quants over at Econbrowser. Or, among many others, an experienced bond market hand, a London-based currency trader, a Beijing-based emerging markets guru, an informed critic of the financial sector and a former professional Fedwatcher turned amateur Fedwatcher.* And a host of financial journalists around the world. The ability to try to hash out, in real time, crucial questions with true experts is the great advantage of the web.

This blog also had the unexpected virtue of making my work accessible to my parents, and convincing them – scientists both – that I did some real work, at least on occasion.**

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Geoeconomics, in pictures


This post is by Brad Setser and Paul Swartz of the Council on Foreign Relations.

No doubt today’s GDP release will attract the lion’s share of the econoblogosphere’s attention. But sometimes it is a good idea to counter-program.

Paul Swartz, I and others at the Council’s Center for Geoeconomic Studies have been – at the prodding of our boss – trying to come up with indicators that capture “Geoeconomic” risk. Or at least to develop measures some key “geoeconomic” concepts, with geoeconomics defined as anything that touches on both the economy and geopolitics. An example might be the gapminder chart we did for the Council’s multimedia spectacular on the financial crisis that touches on the question of whether the G-7 still brings together the world’s most economically powerful countries.

I am not sure that we have succeeded, though I do think we have come up with some interesting ideas – ideas, though, that need to be stress tested with a bit of external scrutiny. Call this a very rough working draft.

One idea has been to look at what share of the world’s total economic output is produced by democratic countries. To do this, we weighted output by a measure of a country’s political openness (from the Polity IV project). A low score implies that all of the world’s output is produced in countries that are not democracies. A high score means all the output is produced by countries that are well-functioning democracies. And a score in the middle means something in the middle – either there are a lot of economically large democracies and a lot of economically large autocracies, or that a lot of global output is produced by countries that aren’t total autocracies nor perfect democracies.

The results are interesting; the end of the Cold war increased the share of output produced by the world’s democracies. But China’s ability to grow rapidly with significantly democraticizing has made the global economy a bit less “democratic” (in the sense that less of the world’s output is produced by democracies).


That implies that if current economic trends – meaning the gap between the rate of growth between autocratic and more democratic countries — continue, the share of global output produced by democracies will decline over time.

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Huge thanks

by Brad Setser

This is Brad Setser. I am back, and will resume posting soon.

But I first wanted to offer my enormous thanks to Mark Dow of Pharo and Rachel Ziemba of RGEMonitor for filling in here when I was away. They set a standard that I will have a hard time matching.

Two weeks is a long time in blog land. I though needed a true break – and thanks to their efforts, this blog didn’t miss a beat. I can not thank them enough.

Gone fishing; back in two weeks

by Brad Setser

I’ll be away for most of the next two weeks — and do not intend to post from the road. But I have lined up two excellent guest bloggers: Rachel Ziemba of RGEMonitor and Mark Dow of Pharo Management, a hedge fund.

Rachel Ziemba co-wrote several papers on the Gulf’s sovereign funds with me, and has guest-blogged here in the past; and

Mark Dow is a former Treasury and IMF economist who migrated over time to the world of money management. I got to know Mark when he was managing an emerging market bond portfolio, but at Pharo his investments range widely across countries and assets classes — and he has promised to try to help elucidate the sometimes evasive link between markets and economics.


Too much, or too little

by Brad Setser

Free exchange is worried that the Obama Administration wants to change too much:

WHEN asked my assessment of the government’s handling of the financial crisis, I usually say it is too soon to tell. But I am very concerned it is doing too much, too soon and too fast. Their current agenda (not even an exhaustive list): fix financial markets, boost aggregate demand, set up a new regulatory framework, decide how much bankers should be paid, create a market for green technology, repair infrastructure, repair schools, and fix entitlements. That would be ambitious for God to achieve, even given eight days, let alone mere mortals.

Simon Johnson is worried that the US is doing too little, and thus won’t make the kind of fundamental reforms that the United States needs:

“The financial crisis is abating – although the economic costs continue to mount and new problems may still appear (ask California or Ukraine). At least among the people I talk with on Capitol Hill, there is a very real sense that business is returning to usual; certainly, the lobbyists are out in force, they want what they always want, and it’s hard to see many of them as seriously weakened. How much progress have we made on any of [Rahm] Emanuel’s priority areas or, for that matter, along any other public policy dimension that was previously stuck? The charitable answer would be: this is still a work in progress and you cannot expect miracles overnight. True, but Rahm’s Doctrine .. says that you should implement irreversible change while you still have the chance. Tell me if I missed something, but has there been any breakthrough of any kind?”

A lot of current economic policy debates seem to have a similar character.

The debate over US monetary and fiscal policy, for example.

Is the US macroeconomic response to the crisis too modest (in part because nominal rates cannot go below zero), putting the US at risk of sustained deflation and a prolonged period of subpar growth? Or is it too aggressive, and thus creating a major risk of inflation?

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In the mountains

by Brad Setser

I am taking a few days off. Rachel Ziemba of RGE Monitor will be guest blogging, and Paul Swartz of the Council’s Center for Geoeconomic Studies will be adding a couple of posts as well. There is some chance I will chime in as well. I am certainly curious to see what the December TIC data will show …

Do pay attention to the blog bylines though. Not all posts that appear here this week will be written by me.

This seems quite bad …

by Brad Setser

There is a real risk that the worst financial crisis since the 30s will lead to the sharpest global downturn since the 1930s. The latest ISM survey is rather grim. The New York Times reports:

“Manufacturing activity continued to decline at a rapid rate during the month of December,” said Norbert J. Ore, chairman of the Institute for Supply Management Manufacturing Business Survey Committee. This index was at the lowest reading since June 1980 when it was 30.3 percent. In addition, Mr. Ore said, “New orders have contracted for 13 consecutive months, and are at the lowest level on record going back to January 1948.”

The new orders index was 22.7 percent in December, 5.2 percentage points lower than the 27.9 percent registered in November. No industry sector surveyed reported growth in December; the jobs sector particularly grim. The employment index was 29.9 percent in December, a decrease of 4.3 percentage points from November. That was the lowest reading since November 1982.

Emphasis added. The US index for new orders is at a sixty year low. Korea’s manufacturing output is shrinking faster than in the Asian crisis. Russian manufacturing is poised to shrink more rapidly than in 1998. China, Japan and Europe are all looking at manufacturing contractions too. JPMorgan’s global PMI is at — as one would expect — a record low. Edward Hugh reports that this should translate into a 10% plus contraction in global manufacturing output.

I guess macroeconomic volatility is not a historical relic after all.

My colleague Paul Swartz and the team at the CFR’s Center for Geoeconomic Studies have pulled together a set of charts to help track the current contraction by comparing current data to the average of past recessions. I personally found the charts useful — and I would be interested in your feedback as well. Are there indicators that we should be tracking that we aren’t? And are there indicators that we are tracking that aren’t that interesting? I am pretty sure Paul will be updating the charts regularly. Adding in the results of the latest ISM survey on Monday is an obvious first step …