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August 12, 2010

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Latest Posts from Economist's View


Trade Deficit Explodes

Posted: 12 Aug 2010 12:26 AM PDT

Tim Duy reacts to news that the trade deficit is expanding:

Trade Deficit Explodes, by Tim Duy: In his recent NYT editorial, US Treasury Secretary Timothy Geithner proclaimed:

Even the surge in imports, which lowered the rate of increase of G.D.P., actually reflects healthy and growing American demand.

I imagine that he must then be thrilled by today's trade report, which revealed the trade deficit swelled by $7.9 billion on the back of an explosion of imports. Analysts were quick to note that the new figures will contribute to another downward revision to the already disappointing Q2 GDP report:

"The wider-than-expected trade gap points in itself points to a 0.4 percentage point downward revision to GDP growth, which needs to be added to the 0.8 percentage point estimated downward revision coming from construction and inventories. Added together, these revisions at this point suggest second-quarter real GDP growth will barely be above 1% (call it 1.1%–1.2%)," said John Ryding and Conrad DeQuadros at RDQ Economics.

Peter Newland of Barclays Capital says that his firm's tracking estimate for second-quarter GDP is now at just 0.3% growth. Economist Nouriel Roubini puts the figure at 1.2%.

I think you can argue a trade deficit reflects solid demand growth when the economy is operating near potential, or at least looks headed toward potential. I think such an analysis is ludicrous when unemployment hovers near double digits. Clearly, we have unused capacity. Yet no way to utilize it? Instead, I think the import surge reflects the deeply embedded structural imbalance in which US demand spending is increasingly satisfied with overseas production. In essence, you can stimulate domestic demand, but that demand is offset by an increased import bill. It is, of course, considered crass to suggest the import picture is an impediment to US growth. At least departing CEA Chair Christina Romer was willing to acknowledge the import picture may be a little important:

A bit of you keeps saying that if only those were American products, think of how high GDP growth would have been.

Indeed. The import surge, perhaps, is in part temporary. From Bloomberg:

The expiration of export-tax rebates on some Chinese commodities beginning in July may also cut U.S. imports from China in coming months, helping to narrow the deficit and thus contributing to growth in the third quarter, said Bandholz.

I am not really counting on that story, but one can hope. Note that in the earlier interview, Romer shifts quickly to the export story.

People are buying things. Importantly, exports are growing at 10%. We've always said that we have a demand problem and that one way to deal with it is to get foreigners to buy more of our products.

Geithner too is enamored with the potential of export growth:

Exports are booming because American companies are very competitive and lead the world in many high-tech industries

Federal Reserve Chairman Ben Bernanke also places significant weight on the export picture:

At the same time, rising U.S. exports, reflecting the expansion of the global economy and the recovery of world trade, have helped foster growth in the U.S. manufacturing sector.

Unfortunately, all look to be behind the curve on the trend in real exports:

FW081210

Combined trends in exports and imports are simply not supportive of economic growth. And, given the current state of the global financial architecture, where the US is expected to be the repository of global savings, it is difficult to see how the external sector contributes positively to the recovery.

"Luxury in the Use of Rings"

Posted: 12 Aug 2010 12:24 AM PDT

Gaius Plinius Secundus, a Roman, was better known as Pliny the Elder:

Pliny the Elder (23/4-79 CE): Natural History, XXXIII.6: Luxury in the Use of Rings: It was the custom at first to wear rings on a single finger only---the one next to the little finger, and this we see to be the case in the statues of Numa and Servius Tullius. Later it became usual to put rings on the finger next to the thumb, even with statues of the gods; and more recently still it has been the fashion to wear them upon the little finger too. Among the Gauls and Britons the middle finger---it is said---is used for the purpose. At the present day, however, with us, this is the only finger that is excepted, for all the others are loaded with rings, smaller rings even being separately adapted for the smaller joints of the fingers.
Some people thrust several rings upon the little finger alone; while others wear but one ring upon this finger, the ring that carries the seal upon the signet ring itself, this last being carefully shut up as an object of rarity, too precious to be worn in common use, and only to be taken from the coffer as from a sanctuary. And thus is the wearing of a single ring upon the little finger, no more than an ostentatious advertisement that the owner has property of a more precious nature under seal at home.
Some too make a parade of their rings, whilst to others it is a decided labor to wear more than one at a time; some, in their solicitude for the safety of their gems, make the hoop of gold tinsel, and fill it with lighter material than gold, thinking thereby to diminish the risks of a fall. Others again, are in the habit of concealing poisons beneath their ring stones, and so wear them as instruments of death; so e.g. did Demosthenes, mightiest of Greek orators. And besides, how many of the crimes that are stimulated by cupidity, are committed by the instrumentality of rings!
Happy the times; yes, truly innocent when no seal was ever put on anything! At the present day, indeed, our very food and drink even have to be kept from theft through the agency of the ring. This of course is thanks to those legions of slaves, those throngs of foreigners who are introduced into our houses, multitudes so great that we have to have a nomenclator [professional remembrancer] to tell us even the names of our own servants. Different surely it was in the times of our forefathers, when each person possessed a single slave only, one of his master's own lineage, called Marcipor [Marcus's boy] or Lucipor [Lucius's boy], from his master's name, as the case might be, and taking all his meals with him in common; when, too, there was no need to take precautions at home by keeping a watch upon the servants. But at present, we not only buy dainties that are sure to be pilfered but hands to pilfer them as well; and so far from its being enough to keep the very keys sealed, often the signet ring is taken from the owner's finger while he is overpowered with sleep, or actually lying on his death bed.

[Source: William Stearns Davis, ed., Readings in Ancient History: Illustrative Extracts from the Sources, 2 Vols. (Boston: Allyn and Bacon, 1912-13), Vol. II: Rome and the West.]

Renminbi-Yen-Dollar Collision Course

Posted: 12 Aug 2010 12:21 AM PDT

Tim Duy looks at how currency flows are likely to evolve:

Renminbi-Yen-Dollar Collision Course, by Tim Duy: Currency flows are potentially evolving in such a way as to keep international analysts glued to the news cycle. The story arguably begins with China's decision to allow greater currency flexibility, an event that was greeted by the financial press as a sign of China's economic maturity and a phenomenal win for the US Treasury. But the story just evolves in new and interesting directions. From the Wall Street Journal:

A strong yen is giving Tokyo an awful headache. Beijing is adding to the problem. If things get worse, these old rivals could find themselves facing off in global currency markets.

China has ramped up its stockpiling of yen this year, snapping up $5.3 billion worth of the currency in June, Japan's Ministry of Finance reported Monday. China has already bought $20 billion worth of yen financial assets this year, almost five times as much as it did in the previous five years combined. That's making the yen even stronger than it otherwise would be.

Interestingly, to the extent that China makes a minor adjustment to the Dollar peg, authorities simply redirect some of those capital flows to Japan. Note that, arguably, Japan is the least capable of absorbing those flows. Seriously, Japan is the biggest basket case in the industrialized world (although US policymakers are sprinting to keep up). The all too predictable outcome, via Bloomberg:

Japan will pay closer attention to movements in the yen, which have been "a little bit one-sided" after the U.S. Federal Reserve announced a plan to boost the world's biggest economy, Japanese Finance Minister Yoshihiko Noda said.

"Excessive and disorderly currency moves are harmful for the stability of the economy," Noda told reporters in Tokyo today. "We will keep a close watch on the market and pay closer attention to it."

Noda's comments signal growing concern among politicians about the risk the yen's climb toward a 15-year high poses to the export-driven recovery. The yen gained against all 16 major counterparts today as investors bought safer assets on speculation the global economic recovery is slowing.

The Fed said yesterday it will maintain its holdings of securities to stop money from draining out of the financial system. Japanese stocks declined, with the benchmark Nikkei 225 Stock Average falling 2.5 percent, after the announcement failed to quell concern a recovery will falter.

And, via Dow Jones:

Japan's Ministry of Economy, Trade and Industry announced Wednesday it will conduct an emergency survey of approximately 200 companies to assess how the recently strong yen has affected their operations, the Nikkei business daily reported on its online edition Wednesday.

The news comes as the dollar dropped to a 15-year low against the yen Wednesday at Y84.72, a development that is likely to increase concerns among Japanese exporters. A strong yen makes Japanese products more expensive overseas and eats into revenue sent back to Japan.

The trade ministry's survey will question firms on how the recently strong yen has impacted upon management issues related to exports, as well as sounding out how companies intend to deal with the effects of the strong yen going forward, according to the Nikkei.

And note the global slowdown is weighing on Japan too:

Japan's machinery orders recovered in June, but growth was weaker than expected, suggesting the strong yen, slowing exports and a murky global economic outlook are making Japanese companies more cautious about expanding.

Will Japanese authorities intervene to keep a lid on the Yen's appreciation? The consensus among analysts is they will not. Via the New York Times:

Indeed, many analysts do not expect Japan to intervene. To be effective, such intervention requires international coordination; moreover, Tokyo has supported Washington's efforts to pressure China to let its currency appreciate, as part of a commitment among the world's largest economies to let market forces determine currency levels.

You see, currency manipulation is considered out of style for everyone but the Chinese authorities. Japan is expected to continue to play ball with the G-20 stance. Even if it makes little economic sense - a good case can be made that the best policy option for at least two nations, the US and Japan, is to easing quantitatively via the purchase of foreign currencies, just not each other's. (As an aside, I find the obligatory line about the importance of "international coordination" just plain silly. It seems that China has managed to independently manipulate currency values quite effectively).

Now, suppose Japanese officials believe that intervention is required regardless of the G-20. Presumably, they will give US Treasury Secretary Timothy Geithner a phone call to at least keep him in the loop, if not to receive his implicit consent. One wonders if Geithner will recognize what he would be consenting to: Japanese intervention, if it occurs, means that Chinese authorities managed to get Japan to acquire their Dollar reserves for them. Instead of buying Dollars, China buys Yen, which in turn induce Japan to buy Dollars. This maintains the artificial capital flows to the US while allowing China to escape accusations of being a "currency manipulator."

By the way, how is that Chinese revaluation going? Predictably disappointing. Note this story from Bloomberg:

Chinese policy makers may have extra room to loosen lending curbs and boost investment in coming months after slower growth in retail sales and industrial output signaled ebbing inflation pressures.

July's 3.3 percent gain in consumer prices, announced by the statistics bureau in Beijing yesterday, may be the peak for the year, according to Nomura Holdings Inc. and Mizuho Securities Asia Ltd.

Industrial production expanded at the weakest pace in 11 months in July, highlighting the moderation in growth triggered by government curbs including a 7.5 trillion yuan ($1.1 trillion) lending limit for 2010. Softening export orders show the risk that weakness in overseas demand will drive a deeper slowdown in the world's third-biggest economy.

"Policy makers may have more room to sustain growth if needed," said Sun Chi, a Hong Kong-based economist at Nomura, who previously worked for the U.S. Treasury in Beijing. "The lending quota could be loosened to sustain ongoing investment projects."

Recall, one of the reasons to allow the renminbi to appreciate was to keep a lid on inflationary pressures. But that rationale will be off the table now that inflation has "peaked" and growth is ebbing. The People's Bank of China is quick to react:

China's yuan fell the most in seven weeks on speculation policy makers will counter appreciation amid signs of a slowdown in the world's third-largest economy.

The People's Bank of China today lowered its daily reference rate by 0.36 percent to 6.8015 per dollar, the steepest drop since a dollar peg was scrapped in July 2005, after a gauge of the greenback's strength jumped the most since 2008. Industrial output rose 13.4 percent from a year earlier in July, the smallest gain in 11 months, and bank lending increased by the least since March, reports showed yesterday.

"China's central bank may be adjusting the pace of appreciation since yesterday's data wasn't good," said Liu Dongliang, a Shenzhen-based analyst at China Merchants Bank Co., the country's six-largest lender by market value. "It's also probably due to the dollar's broader strength."

Note the reference rate. Remember where we started? Bloomberg remembers:

China loosened controls on the yuan's exchange rate on June 19, after keeping the exchange rate at about 6.83 per dollar for almost two years. The yuan has since strengthened 0.5 percent.

A whopping half a percent, and apparently no more to come given the deteriorating economic outlook. One wonders, given the exploding US trade deficit, how much longer US officials will tolerate this farce? Have the imbalances already become too deep, too entrenched, that they can be resolved with nothing short of another financial crisis? Increasingly, I fear this is true.

links for 2010-08-11

Posted: 11 Aug 2010 11:04 PM PDT

"When Clowns Like Glenn Beck are Its Leaders..."

Posted: 11 Aug 2010 05:45 PM PDT

Bruce Bartlett says that yes, there was trouble in the relationship and an eventual break-up, but he wasn't the one who changed:

Am I on the Right or Left?, by Bruce Bartlett: This is not something I spend much time worrying about, but it seems to matter to Arnold Kling, who criticizes Ezra Klein for locating me on the right side of the political spectrum in a recent post about the Laffer Curve. ...
On the question of where I place myself on the political spectrum, I will have more to say as time goes on. In my own mind, I have the same political philosophy I've always had--basically libertarian but tempered by Burkean small-C conservatism. But I am no longer a member of the Republican Party and no longer consider myself part of the "conservative movement." That's not because I changed, but because I believe that they have. The Republican Party of today is not the party of Jack Kemp and Ronald Reagan that I was once a member of; it stands for nothing except the pursuit of power as an end in itself, with no concern whatsoever for what is right for the country. In a recent interview with The Economist magazine, I characterized the Republicans as the greedy, sociopathic party. I stand by that.
As far as the conservative movement is concerned, I think Russell Kirk and Bill Buckley would be absolute[ly] aghast at the things it stands for today and the people that are acclaimed as its leaders. When clowns like Glenn Beck are its leaders and right-wing bigots pander to ignorant yahoos about a planned mosque in lower Manhattan, I want to be as far away from any such movement as I possibly can. And readers of this blog know what I think of the know-nothing tea party movement, which conservatives have latched onto en masse.
Anyway, I am happy to classify myself, politically, as an independent these days; nothing more, nothing less.

Should We Brace for Deflation Now?

Posted: 11 Aug 2010 03:48 PM PDT

The NY Times Room for Debate asks:

How likely is prospect of deflation, given the latest economic indicators? Has the American economy experienced sustained deflation, aside from the 1930s (if not, is that because there's something particular about the U.S. economy that make deflation less of a threat)? What's the way out?

Here's my response. There are also responses from Tyler Cowen, Simon Johnson, Heather Boushey, and Brad DeLong.

Reinhart and Rogoff: Debt and Growth Revisited

Posted: 11 Aug 2010 10:07 AM PDT

I think it's reasonable to assume that this is a response mainly to Paul Krugman (and if he responds, I'll add an update). In addition to the points Krugman has made, what I don't like about the analysis is that it only looks at the risk of adding to the deficit, it doesn't compare the risk posed by higher debt to the risk of doing nothing (or worse, contracting the deficit before the economy has recovered sufficiently).

For example, suppose that increasing the deficit means a 10% chance of growth being lower in the future by, say, .5% (the degree to which this actually happens is one of the controversial points). Then, in isolation, it looks like increasing the deficit is risky for growth. But suppose also that failing to pursue a more aggressive policy, i.e. more deficit spending, to reduce long-term unemployment (to name just one possibility) risks creating a permanent unemployment problem and that, in turn, risks lower growth. Suppose also that the there is a 20% risk of a .5% reduction in growth if nothing is done to combat the unemployment problem. The choice, then, is a 10% chance of lower growth with more deficit spending (again, the degree to which this actually happens is part of the controversy), and a 20% chance of lower growth if no further help is provided through an increase in deficit spending (and the odds would be even higher if austerity -- deficit reduction -- is pursued instead of holding the deficit at its current level). By only presenting the risks on one side of the decision that policymakers must make, the analysis leaves a distorted impression of the options. [Update: Paul Krugman responds, "Reinhart And Rogoff Are Confusing Me."]:

Debt and growth revisited, by Carmen M. Reinhart and Kenneth Rogoff, Vox EU: Economics has been under fire since the recent crisis for enshrining abstract models that offer little connection to the real world. In "Growth in a Time of Debt," our data-intensive approach aims at providing stylized facts, well beyond selective anecdotal evidence, on the contemporaneous link between debt, growth, and inflation at a time in which the world wealthiest economies are confronting a peacetime surge in public debt not seen since the Great Depression of 1930s, and indeed virtually never in peacetime. As Paul Krugman (2009) observed, "they'll (the economists) have to do their best to incorporate the realities of finance into macroeconomics." One might add as a corollary, however, that such discipline is especially needed when those realities are inconvenient to strongly-held opinions.
And you don't have to look far these days to find such strong opinions about the fork-in-the-road facing advanced economies when it comes to debt. There is no shortage of recommendations for either path, see for example see the Vox columns by Calvo 2010, Corsetti 2010, and Giavazzi 2010 last month.
In a recent paper, we studied economic growth and inflation at different levels of government and external debt (Reinhart and Rogoff 2010a). The public discussion of our empirical strategy and results has been somewhat muddled. Here, we attempt to clarify matters, particularly with respect to sample coverage (our evidence encompasses 44 countries over two centuries – not just the US), debt-growth causality (our book emphasises the bi-directional nature of the relationship), as well as nonlinearities in the debt-growth connection and thresholds evident in the data. These are fundamental points that seem to have been lost in some of the commentary.
In addition to clarifying the earlier results, this column enriches our original analysis by providing further discussion of the high debt (over 90% of GDP) episodes and their incidence. Some of the implications of our analysis, including for the US, are taken up in the final section. ... [...continue reading...]

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