Tuesday, January 11, 2005

Pessimism of the intellect

Two must-read commentaries on the current account and macro environment by Brad Setser and Stephen Roach.

Roach: "The real federal funds rate was lowered into negative territory in 2002 and has only very recently moved back to the “zero” threshold.  This marks the most protracted period of negative real short-term US interest rates since the late 1970s -- hardly a comforting comparison.  Carry trades have become no-brainers for yield-starved investors, who can borrow for nothing at the short end of the curve and pocket the spread virtually anywhere else in the risk spectrum.  Carry trades also become no-brainers for income-short American consumers, who can draw down income-based saving and use a very facile refinancing technology to extract newfound purchasing power from asset markets."

Setser: "Today's trade deficit is not only much bigger than our deficit back in the 1980s – when grown-ups like James Baker decided it was too big – it also is much riskier. The US back then had, more or less, as many external assets as liabilities. That is NOT the case now. Our liabilities exceed our assets, and by a substantial margin. Our net debt will be 27-28% of GDP at the end of the year.

Global rebalancing means that over time, the US needs to export more goods and services and less debt. Either that, or it will have to import a lot less. To me, this is common sense, not media misinformation. No country, not even the US, can run up its external debt forever."


Anonymous said...

The question is how can the carry trade be wound down in a gentle way? Derivative positions are not easily pared in a tough market as we learned in 1994 and 1998 with bonds. There seems no limit to the prices of residential property in New York City or San Francisco. Suppose there is a limit?

Anonymous said...

International investors may be buying Chinese assets, as Warren Buffett has done with China oil, but I am entirely sure that China will allow the Yuan to appreciate only when she wishes and not when speculators might wish. China's leadership is deliberative and confident and surely not to be pushed about.


Anonymous said...


U.S. Official Faults China on Textile Trade Moves

HONG KONG - China's imposition of tariffs on apparel exports two weeks ago does not address the concerns of the United States, which wants Beijing to remove barriers to American fabric exports and end local and provincial subsidies for apparel factories, a senior American trade official said here on Monday.

The complex global system of quotas that has governed international trade in textiles and apparel for more than three decades expired on Dec. 31. That has prompted fears in the United States that low-cost Chinese exports may flood American and European markets and bankrupt local companies.


Anonymous said...

Looking at this pragmatically, United State's citizens are in for considerably lower wages in the near-term of one to five years. Buying low-cost goods at WalMart and expecting to maintain the same high living standard indefinitly isn't possible.

When the dollar has declined sufficiently our trace deficit will lesson. --Of course this will inflict higher interest rates as the Fed steps in. Why people can't learn the basics of economics is beyond me.

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