Can you see the signs of spring in the coming of winter? A note about the recession.

My framework for analysis of current economic events sees this as the end of the post-WWII geopolitical and economic regime.  Like walking through a forest and seeing only trees, it is difficult to grasp the magnitude of these events.  Long-term graphs are needed, and easily show that current events reflect the ending of a long cycle — and transition to a new and different one.  The key word is cycle.  Although Winter might be dark and long, Spring will come again.  Look closely at current trends and you will see the new era emerging.

Here are two examples.

1.  New foreclosures as a percent of all mortgages

One of the major drivers of US growth during the past few decades has been the post-WWII debt supercycle:  the massive increase of US household debt (a term coined long ago by the folks at Bank Credit Analyst).  This accelerated after the 1982 recession, again in the mid-1990’s, and again after 2001.  Now the trend turns.

We enjoyed adding debt — like knocking back too many brews at the local pub.  The inevitable de-leveraging — like the resulting hangover — usually means a period of suffering.

This is from “Economic Snapshot September 2008“, Christian E. Weller, Center for American Progress. 9 September 2008.  I recommend it as an excellent summary of the US economy’s condition.  Weller is an Associate Professor of Public Policy at the U of Mass.

2.  US exports

I have said that this economic cycle will end with

  • the US dollar declining in value
  • so that US exports of goods and services are more competitive on world markets, and
  • we can earn the money to pay interest and principle of our foreign debts.

This means we will be poorer (able to buy fewer foreign goods), but our economy will again be on a firm foundation.

A frequent reply is that “the US no longer makes things” or that this natural economic re-balancing need never (or will never) happen to America.  All are odd replies, because this is happening right now.

From Contrary Investor, 4 September 2008.

The growth of exports in absolute terms will slow along with the global economy, but the trend is clear — important and very good news.  America must earn its way in the world, and by some means other than as a largely unwanted global policeman.

Please share your comments by posting below.  Please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about this subject

  1. A brief note on the US Dollar. Is this like August 1914? (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
  2. The post-WWII geopolitical regime is dying. Chapter One (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
  4. Death of the post-WWII geopolitical regime, III – death by debt (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  5. Geopolitical implications of the current economic downturn (24 January 2008) – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.
  6. A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
  7. What will America look like after this recession? (18 March 208)  — More forecasts.  The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
  8. The most important story in this week’s newspapers (22 May 2008) — How solvent is the US government? They report the facts to us every year.
  9. The geopolitics of inflation, an introduction (17 June 2008) — Inflation is probably not what you think it is.

To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.

18 thoughts on “Can you see the signs of spring in the coming of winter? A note about the recession.

  1. In order for this process of establishing a sound US trade balance not to extended over too many decades, China, Japan, and the oil producing Arab states will have to accept a considerable change in their dollar pegging. Any signs that is in the works?
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    Fabius Maximus replies: Japan is a special case, due to its internal decay, so let’s ignore that for now.

    As for China and the Arab oil-exporters, yes! In a sense. Economic adjustments do not happen due to human wisdom, recognizing the “right things to do.” They happen because unsustainable imbalance create “forces” (pseudo-forces, like centripetal force) that drive change.

    What happens if a state has a undervalued currency and too-low interest rates (they go together)? Accellerating inflation. It is the “cost” of these policies. And that’s what’s happening in China and the Arab exporters. They are taking the usual first responses: price and/or capital controls, faking the CPI numbers. These inevitably fail.

    At some point a policy response becomes inevitable. Or hyperinflation and currency collapse results (with Weimer that eventually led to Hitler). Either way the imbalance gets resolved. Like most things, it takes time.

  2. I guess I’d always believed the “We don’t make things here” line, though the numbers you’re pointing to seem like good evidence against. Any idea why the idea’s been so popular? Is it the fact that our exports haven’t kept up with imports? Decline of traditional manufacturing? The fact that finance and R&D get more profile (and maybe a larger share of capital) in today’s economy?
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    Fabius Maximus replies: We can only guess at such things. Perhaps…

    (1) Manufacturing employment has been in a long-term decline, largely due to productivity gains (great for the US, bad for the folks losing jobs).

    (2) Our exports have shifted from “big iron” (steel, autos) to less tangible things like entertainment and software. Since public tends to think of exports in terms of the former, they have a distorted picture.

    (3) Economics is one of the most popular undergraduate majors in America, but is consists mostly of basic theory which leaves students in functional terms almost as ignorant as when they started. To use a bad analogy, just as teaching the theory of organic chemistry does little when cooking a meal.

  3. I have been living beside the BNSF RR for 36 years and have seen a lot of rail freight roll by coming in and out of Chicago. In the past, I used to see a lot of durable goods like farm implements headed westward. I used to see a lot of autos headed west. I could judge the local job market by the amount of durable goods being shipped. Now that is all gone. When I see autos they are headed east not west and I don’t see much of them anymore. I no longer see slabs of Aluminum headed east. I no longer see cars of lumber headed east. I used to see a lot more chemicals than I do now. Nowadays, it is mostly coal, corn sweeteners, grain and container cargo headed east. A lot more cars are empty. I see a lot more locomotive ferries, i.e., engines running by w/no freight to haul. The total number of freights in or out of Chicago seems to have diminished.

  4. Fabius, your export statistic is useless in his context. The NET export is the relevant symptom. And that one is still in deep red.
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    Fabius Maximus replies: I disagree. While the net is important, the components are the real action. The falling dollar both decreases imports and increases exports, eventually resolving the trade balance. As I have discussed in many previous posts. (Note that imports ex-oil are already falling as % GDP; due to combination of a lower USD and slowing US economy).

    This post discusses rising exports — a rebuttal to the popular belief that “we do still export things.” Not every post need be 2,000 words on the full dynamics of our trade and capital flows.

    Nor are rising exports as % GDP “useless”. This is half of the solution.

    See “Geopolitical implications of the current economic downturn” for a more complete analysis.

  5. On the debt problems, I’m pretty sure there is a lot more ‘slow, low, or no’ growth coming for the USA. The gloom and doom Center for American Progress gives away its bias tho:
    “Yet easing the burden on families will not be easy, since massive trade deficits are draining our national resources and budget deficits due to tax cuts for the rich are posing obstacles to real solutions for America’s families.”

    After the Bush tax cuts, the rich paid a higher percentage of income taxes paid than before. The gov’t revenue went up, strongly and in line with forecasts. The budget deficit is due … to too much gov’t spending. Pork and other middle class bribery receiving goodies. Spending Other People’s Money. (The Dem Party proposal to solve the current problems).

    Despite the Center being biased and somewhat dishonest in its implied “tax the rich” (=punish the successful, punishe the investors) policy, many of the problematic facts are there.

    One of the most important for the housing mess is this: previously, over many years, about 65% of Americans were homeowners. Under the Fannie/Freddie ‘we accept Liar Loan mortgages’, this has increased to over 69%. There are probably some 3-4% of Americans trying to buy homes they can’t really afford.

    Here’s my suggestion, a new GI Housing bill: a $1000 / month Combat tour bonus for all GIs who have been fighting in Iraq and/or Afghanistan, up to a maximum of $22 000 (about half the avg yearly US salary), to be used only as a downpayment for purchasing an owner-occupied home. Allowing sale of old and buying new. [I haven’t heard of anybody suggesting this yet.]

    I recall arguing in a prior post how the falling dollar will increase exports, and thus eventually stop the fall of the dollar — I’m glad you’re providing such clear evidence of this. I’d guess it would be a good time for foreigners to buy US houses.

    The other way to reduce debt is … to spend less borrowed money. Which consumers are doing, but that lowers consumption and demand for workers and jobs.

    I’m sure you’re not right here:
    What happens if a state has a undervalued currency and too-low interest rates (they go together)? Accellerating inflation.

    The low interest rates cause ‘too much’ investment, and asset price increase (like the housing bubble!) as well as high real growth of the economy. But the undervalued currency means there are too many exports and not enough imports, thus a trade and employment surplus — China seems willing to eat the currency losses in order to enjoy the export jobs. I suspect there are too many complex contradictions in China to be able to forecast well.

    As the US housing bubble increased home ownership, it also increased prices. They went from the previous 5-10 times annual salary to up to 20 times. These are clear signals in the mature US market that ‘too much housing’ is being invested in.

    I can believe that many Chinese investments have low rates of return, are almost inefficient, but at the low Chinese rates are not really loss making — and they are some kind of investment. China’s hundreds of millions can absorb a huge amount of homes and durable goods and still have less material wealth than most unemployed Americans.
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    Fabius Maximus replies: I do not understand what you are saying in reply to “low rates and undervalued fx => inflation.”

    The core of the housing prices is excess supply (overbuilding). There are aprx 4 -5 million vacant housing units above the historical average rate (e.g., for own-oc today today aprox 2.9% vs. average 1.5%). Only net new households net change in supply (construction – destruction) will absorb this, unless prices fall to a point where investors willing hold inventory (vacant units) on the expectation of future price gains. Moving households from rentals to own-oc does not change the supply/demand balance of housing units.
    Zimbabwe’s hyperinflation was more because of no exports, and an always over-valued currency. Very different.

  6. Can you see the signs of spring in the coming of winter?

    “I like to watch” – Chance Gardener, economic visionary!

    America may not make as much as they ‘could’, but the strength has been in having ideas. OPEC has announced it will be cutting oil production to try and keep it at the $100 mark, this has already caused a spike in price again. So has this rebalancing finished?

    Add to that all the proposals now coming online to line the Eastern USA with wind farms and the obvious job creation this will create. America seems to have weathered this storm, but as long as we are not mistaken and this is not just the ‘eye’.

    Offshore wind farms may line U.S. coast“, AP, 9 Spetember 2008
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    Fabius Maximus replies: We can only guess at such things, but I suspect the adjustment process has barely started. It took decades for these imbalances to build.

  7. FM wrote about the decline of the US Dollar (USD). Longer term, the solution is the decline of use of USD as a reserve currency. This is a long process much akin to the process of the decline of Pound Sterling as a reserve currency from roughly WW I to WW II.

    In the short term, currencies are valued on a relative basis and the USD has little to decline in value against. There are three major reserve currencies in the world: USD, Euro and Yen. In the short run, European economies are weakening and the Dollar is unlikely to decline against EUR. The Yen is not big enough to be a major reserve curreny by itself and Japan has its own problems to deal with right now.

    For the gold bugs: there is gold as a reserve currency. However, the size of the gold market relative to the size of FX reserves in the world makes it unrealistic for central banks to hold gold as a major portion of their reserves. If the Fed sold all of its gold reserves at current prices, it would only make a minor dent in the current year’s fiscal deficit. If you totaled the market value of all the gold mining companies in the world, that figure is smaller than the market value of Intel.
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    Fabius Maximus replies: “USD has little to decline in value against.”

    Total myth. A reserve currency is not necessary, so the lack of a replacement is not important. Nations could relatively easily move their currency reserves to a match a basket (that is, hold a mix of reserves proportional to their mix of imports, or net trade, or combination of trade and foreign debts). Nor does a gold standard require nations to hold any gold, just adjust their currencies to maintain a fixed ratio to gold (I consider such a system very unlikely to be adopted, but it is possible in theory).

  8. “I disagree. While the net is important, the components are the real action.”

    You seem to ignore that rising exports may mean a lot; globalization trend, for example. The import statistic is the counterweight and can destroy whatever was achieved in experts. That’s why we need to look at the trade balance, not just exports.

    “The falling dollar both decreases imports and increases exports, eventually resolving the trade balance.”

    That’s the usual prediction and I wrote this in comments here already months ago, but you used an unsuitable variable to reinforce it. Actually, I’m too lazy to search for the most recent statistics on trade balance. I’ve got only ’06 values and hoped to be rewarded for my laziness by seeing a ’07 source here ;-)

    “This post discusses rising exports — a rebuttal to the popular belief that “we do still export things.””

    I’d be VERY surprised if people really thought that the U.S. exports NOTHING. I’d consider every negating comment about U.S. exports as an inaccurate expression of concern about the negative trade balance.
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    Fabius Maximus replies: I do not understand what you are attempting to say, but this seems an extraordinarily weak comment. Your objections to my post are just conjectural, based on being “too lazy to search for the most recent statistics on trade balance”, and are in fact incorrect.

    The US dollar has declined substantially. Theory says that this should result in higher exports and lower imports. That is exactly what has happened, although masked by rising oil prices. For details see Brad Setser’s (economist at the Council on Foreign Relations) analysis of the monthly trade numbers. For June 2008:

    “And in June, US exports were up 21.1% y.y ($164.4b v $135.7b). Non-petrol good exports were up 17.7% y/y — so it wasn’t all driven by higher prices on the United States (small) petroleum exports. Real goods exports were up 11% in June, and 9.6% for the first half of the year. And real non-oil goods imports aren’t growing. Real non-petrol goods imports in June 2008 were 2.7% lower than in June 2007 — and for h1, real non-petrol goods imports are down by a bit less than 1%.

    “… In the first half of the year, the US non-petroleum goods deficit fell by $51 billion. But the petroleum deficit increased by $69 billion, pushing the goods deficit up. The services surplus improved by $25b — bringing the overall deficit down a bit, but only a bit.

    “… In June, real imports of industrial supplies — a category that includes oil — are down 9.2% relative to June 2007. Real imports of autos are down 6.6%. That hurts Japan (and Canada) more than most countries. Real imports of consumer goods are only up 1% — which isn’t great for China. Real exports of capital goods (airplines, turbines and the like) are up by 10%. Real exports of industrial supplies are up an impressive 17.4%.

    Calculated Risk has a graph here that shows this data very clearly.

  9. Statistics and graphs of them can be misleading. Your graph shows the twenty year average of foreclosures as a percentage of mortgages as around .4%, while the current number is 1.2%. The graph shows that as quite a steep jump. But if the graph intervals were whole percents, it would only be ripple.

    The graph that shows exports increasing as a percentage of GDP could also be misleading if GDP had declined or remained flat during the latest period.
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    Fabius Maximus replies: (1) The apparent jump would be even smaller is using units of 20%. Or 1000%! The scale shown must be proportionate to the numbers; by convention with the largest number near the peak of the “y” axis.

    The best way to show this data would be a log graph, or a graph showing rate of change. These would make the increase look larger, not smaller. But at the cost of using displays both unfamilar to most people and difficult to grasp.

    (2) These numbers are shown as a percent of GDP, not absolute numbers, for two reasons. First, to avoid an increasing trend over time merely due to inflation and general economic growth. Second, the intent is to show the increasing importance of exports to the overall US economy, and their increasing ability to generate funds to pay our foreign debts.

  10. Here’s my view as a village raised member of the proles. Go to Wal-Mart or any big box store and try to find goods made in the U.S.(excluding some food stuffs). You won’t find much, nothing like it was 20 or even 10 years ago.

    Our manufacturing base today is a joke.

    And many manufacturing jobs which used to sustain the middle-class have been replaced by low wage low benefit service jobs. Want a career in the high tech field? you now have to fear not only being out-sourced to China but in-sourced. With in-sourcing a American company contracts with a firm in Bombay to import a Hindu worker(under a H1-B or L-1 visa) at half the pay of a American worker. Labor arbitrage at its finest.

    Oh, if you think some silly rigging the currency market will fix our exploding trade imbalances, the Chinese are already one step ahead of you. They already looking at countries like North Korea and Bangladesh as new labor sources.
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    Fabius Maximus replies: We export entertainment, software, and similar things instead of mfg goods — which now have far lower value-added. You may be nostalgic for the good old days when we exported “big iron”, but life changes and we must adapt. I suggest finding a way to provide middle class incomes to more Americans (a goal), rather than moving us back to to exporting iron, or buggy whips (a now obsolete means to that goal).

    “if you think some silly rigging the currency market will fix our exploding trade imbalances,”

    One of the great oddities of modern history is that currency changes are often considered inconsequential, but always have large effects. Note the graph of rising exports, considered impossible by many people a few years ago.

    The problem of labor arbitrage is a serious one, which gets far too little attention. As you note, open immigration is one of the major forces driving down incomes for both skilled and unskilled workers. Elections are a cure for that. Since few people care about this problem, both parties favor the status quo. Republicans like the resulting cheap wages; Democrats like the new voters.

  11. I would like see the US more competitive in the manufacturing arena but to do that we need to totally reform our internal tax and regulation structures.
    Most of our problems start at home. Our current tax system has turned into a political instrument instead of a revenue instrument. Weller’s article even falls for “the tax cut for the rich” mantra which means we need tax those mean evil rich people more! It would be assumed that the same goes for those evil corporations! Of course the laws of unintended consequense applies. You tax rich people more, the less they invest/risk which means there will be less money for business expansion etc. Tax those evil corporations more, the less likely they will remain in country or keep their manufacturing here. This would mearly be step one. We need to get away from the idea of punishing people for being successful and realize they are examples to motivate us to do the same.

    The value of the dollar, energy, one of the big reasons for the trade inbalance, and immigration, are all important areas to the economic well being of the country. With the current electoral structure though it is difficult to articulate an American grand strategy without being ripped to shreds by the knives of arrogance, self centeredism, special interests, and envy. I’m not confident that our citizens are ready for real change, yet.

  12. FM, you seem to lack a sense for my humour and you seem to need to learn more about international economic theory. You really need to begin to understand the concept of trade balance. Exports in themselves are irrelevant.

    And everything that you think to be able to base on the increasing exports is wrong because of this:
    http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf
    More exports solve absolutely no macro-economic problem at all if the imports grow likewise.

    Any improvements of the U.S trade balance – if they exist at all – are merely in the range of the inflation. And the USD/EUR exchange rate is already going back, weakening the competitiveness of the U.S. economy against others.

    Some of your economic stuff is simply half-baked. Btw, I have a university degree in economics.
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    Fabius Maximus replies: Fabius Maximus had no sense of humor that we know of, so I do my best to imitate him on this site. {Side note: I wrote one funny article for DNI. While both with witty and hillarious, not only did folks not get the jokes but they took it seriously. After the resulting deluge of emails, Chet Richards, the Editor at DNI, threatened dire consequences if I tried anything like that again)

    I discuss most of these points below (since this this is dupe comment, originally eated by the spam trap, I have deleted the overlap with the following comment). I note that your analysis does not match the data, which shows a clear narrowing of the ex-oil trade deficit as % of GDP.

    I have my economics material reviewed by some relevant experts prior to posting. I will stick with their advice..

    “Exports in themselves are irrelevant.”

    What do you mean by this? The trade balance does not result form immaculate conception. It results from exports and imports. This post briefly discusses exports, half the equation.

  13. “Theory says that this should result in higher exports and lower imports. That is exactly what has happened, …”

    WRONG. First of all, theory says that such an exchange rate is an additional influence factor that drives into that direction – it does not say that the result will look like that. Other variables are also in force, like poor competitiveness.

    And it does NOT happen.
    http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf
    Imports rose all the time, every month since early ’07 and almost without exceptions in 2006 as well.
    The trade balance DEFICIT has GROWN in the same time, making export growth a moot point macro-economically. The growth is small and well in the range of inflation and statistical error, but there’s definitely no improvement of the terrible balance deficit visible.

    The USD is already recovering, from about 1.60 USD/€ to about 1.40 USD/€, thereby preliminary crushing hopes that a weak dollar will improve the balance deficit situation.
    http://de.ichart.yahoo.com/z?s=EURUSD=X&t=5y&l=on&z=m&q=l

    Btw, did you delete my previous comment? It had roughly the same content.
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    Fabius Maximus replies: The spam filter ate it. I check it every day or so, and fish out comments trapped in error.

    First, this is not an economics dissertation. I could ALWAY add “but there are other factors at work”, but that would be mindlessly pedantic. The readers here are sufficiently sentient to understand that a few hundred words on such complex topics — about which long books have been written — is just a imple brief.

    Second, I assume you have heard of the J-curve effect? Devaluations take time to have effect. Look at the graph on Calculated Risk.

    Third, as I said, oil is rising vs. all currencies, masking the effects of the deval on US imports and exports. Hence the graph shows imports ex-oil have decreased, as has the trade balance ex-oil as a % of GDP — which is, as you note, the key result we need (given that there is not much we can do about the cost of oil imports over any short or medium term time horizon).

    Also, I am not yet excited about the rebound in the US dollar. No market trend is linear, and a bounce (aka countertrend move) is typical after such a large and long decline.

    BTW — I support these things by cites to noted economists, and have little interest in debating basic economic theory here. I suggest you go to James Hamilton’s Econobrowser or Brad Setser’s page at the CFR to tell them that exchange rate changes have little effect on trade deficits (to repeat, yes there are always other factors at work — single-factor models are of little use in economics or anything else). Setser esp has written several rebuttals to this widespread belief, and why it usually proves wrong.

  14. Well, you could alternatively just read what I write and not invent more (“that exchange rate changes have little effect on trade deficits”).

    Seriously, the trade statistics show no sign of recovery from the terrible balance deficit. Your export statistic doesn’t change that, and the available statistical data seems to suggest that the U.S. economy’s competitiveness is so poor that the weak dollar (and it is becoming stronger in part due to an economic downturn and high interest rates in Europe) is likely not weak enough to even the trade balance yet.

    Instead, the U.S. is integrating more into global trade recently, which explains its increase in exports AND increase in imports. That may be the result of increasing specialization, for example.

    To calculate oil away from imports is pointless. Fact is that oil was imported, and the trade balance deficit will most likely look quite the same in 2008 as in 2007. A lower oil price will benefit countries without domestic oil production more than the USA anyway.

    The key is that even if the oil became suddenly cheap, the improvement of the trade balance deficit would be very slow at best. And lag or not – the Dollar is losing value since late ’05 with little to no visible impact on the trade balance deficit so far. That’s too long for an ordinary lag. Other factors have apparently overshadowed the exchange rate changes’ influence.
    I’d say these other factors were about competitiveness.

    The current global economic complex doesn’t seem to be ready for a dollar that’s weak enough to balance the U.S. trade balance. It looks like this current crisis wasn’t the one that breaks the system yet. Maybe the next one will do that. In the meantime, the U.S. will increase its national debt, and creditors will attempt to protect their assets against a future dollar devaluation – like using dollar money for buying U.S. companies. That movement might in turn create the next crisis.
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    Fabius Maximus replies: Since oil is rising in terms of all currencies and is highly price inelastic, the dollar’s deval cannot have much effect on it at this time. Hence to see the effect of the dollar’s exchange value we look at non-oil balances. As you can see from the articles and graph I repeatedly cite, the US trade deficit ex-oil was peaked at aprox $43 billion in mid-2005, and in June was under $20B — and of course impoved even more as a %GDP.

    “the Dollar is losing value since late ’05 with little to no visible impact on the trade balance deficit so far.”

    The J-curve effect takes very roughly two years to play out, so the gradual slide in the US dollar should only be now starting to appear in the numbers. That we already see a large swing in non-oil trade balance a good sign.

    “Seriously, the trade statistics show no sign of recovery from the terrible balance deficit.”

    Agreed. The total (including oil) trade deficit has improved 8% since its July 2006 peak. But that is decent news given the slow change in the US dollar’s value and the rapid increase in oil prices (from $60 to the the $110 – $140 range this year). We might be in serious trouble now if growth in the cost of our oil imports had not been offset as described above. Oil is a serious problem, but it is a different problem than the structural US trade deficit (or perhaps a new & different layer to the structural deficit.)

    From Brad Setser’s analysis: </”The “real” non-petroleum deficit is improving. The overall deficit isn’t. … The goods and services deficit this year through July is up a little compared to last year ($420b v $416b) — but it is up far less than the overall petrol deficit. The petrol deficit for the first 7 months was $90b larger than the deficit in the first 7 months of last year. And the July petrol deficit was $43.4b — by far the largest component of the overall deficit. But help (lower oil prices) is one the way; the q4 goods and services trade deficit should fall significantly.”

    Note his graphs: Excluding oil in/out, import growth has gone from 10% to -1% while export growth remains aprox 10%. That will have a large impact if continued.

    “Well, you could alternatively just read what I write and not invent more (“that exchange rate changes have little effect on trade deficits”).”

    If that is not what you are saying, what are you saying? I do not understand.

  15. Fab, please correct me if I’m wrong, but I understand your comment in #1 to be saying that two, separate macro effects, individually lead to inflation.
    1) under-valued currency leads to inflation.
    2) (too) low interest rates lead to inflation.
    AND you are saying that both China and Arab exporters have both policies which are leading to accelerating inflation.

    All of these are separate from oil-price increase, which looks a bit like inflation but is not. And while the low interest rates do lead to a housing bubble, which can look like inflation, the popping of the bubble and the rapid fall in house prices is NOT inflation.

    China’s under-valued currency is leading towards massive export growth, and the accumulation of USD reserves — which USD devaluing is reducing in value. Many fear that China can stop investing in US bonds at any time and cause problems in the US. I claim that these would be small problems here, but huge problems there, because for China to stop investing in US bonds, they would have to stop selling the junk they sell in Wal-Mart, and then millions of current Chinese workers would become unemployed. So China is accepting USD, and investing in US bonds, as perhaps the lowest cost, most efficient, gov’t employment policy in China. Not necessarily the profit maximizing choice a capitalist would make — one unconcerned with unemployment.

    I understand that China also has low interest rates, to support export growth but also mal-investment.
    When China is more worried about inflation than unemploymnet, they can allow the value of their currency to rise and reduce the cost of imports while slowing the growth of exports. Or they can increase the interest rates to flush out some of the weakest investments.

    In all cases, when the real economy is growing, the less efficient investment is not such a problem; and I see no reason to think the Chinese economy would grow less than 6% in the foreseable future (OK, excpet for their huge pollution problems — they should be buying coal cleaning tech and services…from US companies!).

    More briefly on oil-price increases which look like inflation because so many prices do go up — it’s not inflation. Because the higher prices consumers pay do NOT go into local companies and are NOT available to pay higher wages. It is a true wealth transfer from oil buyers to oil sellers. The US public needs to get used to this. And the gov’t should have had wind farm building plans, and plans to cover parking lots with solar panels, ready to be activated based on the unemployment rate.
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    Fabius Maximus replies: This is an entirely new discussion about big and complex issues — inflation in other nations, Chinese investment or mal-investment, etc. These are far afield to this post; I try to keep posts narrowly focused.

    I agree with you about oil price increases and inflation, and have written about this in “A giant breaks his chains and again walks the earth: inflation” and “The geopolitics of inflation, an introduction.”

  16. Fabius, I want to apologize. I’m still of the same opinion as expressed in the previous comments, but I violated a rule of mine. I expect that people who comment on my blog behave like guests, and I didn’t do so here myself. Time will tell whose opinion about the economic situation was right anyway.
    .
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    Fabius Maximus replies: No apology necessary. I am more concerned about personal comments directed at others who post here; those receive strong responses.

  17. Update in reply to comment #5 by Tom Grey:

    Grey’s comment: “I’m sure you {FM} are not right here: ‘What happens if a state has a undervalued currency and too-low interest rates (they go together)? Accellerating inflation.'”

    From the website of Brad Delong, Professor of Economics at Berkeley, 12 September 2008. He is blogging from the conference of the Brookings Papers on Economic Activity: The Housing and Financial Crisis. This is from his notes on the panel discussing “Real Exchange Rate and Economic Growth — International evidence shows that undervaluing a nation’s currency stimulates its economic growth, especially for developing countries.”

    DeLong’s notes:

    How do you keep undervaluation going for long? It produces, as we saw in Europe at the end of the 1960s and as we see in China now, rather a lot of inflation. What are the long-run costs of that inflation? Is there a link between the success of European development in the 1950s and 1960s and the long period of prolonged high unemployment in the 1970s and 1980s?

  18. I come late to this and regret you passed on commenting about Japan. I live and work in Japan. Domestic media is filled with stories of contractual workers not being renewed at the end of the fiscal year (31 March) and, accordingly in some cases, soon to be thrown out of corporate housing. Homeless rates are up, especially (if the media is to be believed) among those 50+ because the pay-by-age system results in downsized older workers being too costly to hire; moreover, once you lose a valid address, you essentially become unemployable. To fill this demand, Internet cafes are installing private cubicles and allowing people to use the cafe’s address as their own (and thus get temp jobs). Graduating students who were promised jobs late last year are receiving revocation letters. Oh, and exports are down, but the yen, from my standpoint, is great against the USD.

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