from Follow the Money

It all comes down to oil and houses

August 17, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Or  more precisely, how long the stimulus from rising house values (and the jobs created building and selling houses) can offset the drag of the (growing) oil tax.  Read John Makin in today's Wall Street Journal.  Even the Wall Street Journal oped page occasionally publishes something worth reading.

Oil v housing (and the now rising interest cost on housing debt) is going to be core tension in the US economy so long as the world's central banks and private investors continue to be willing to lend the US the 6.5 to 7% of GDP ($800-$850 billion) the US needs to sustain its current trade deficit.  That money - at least for now - continues to roll in despite the United States' small export base, and now small manufacturing base (compare manufacturing to GDP in China and the US).  It keeps coming in at low rates despite the fact that the US historically has not offered foreign investors very good real returns on their investment in the US.   See Philip Lane and Gian Maria Milesi-Ferretti.

I suspect foreigners will continue to receive disappointing returns on their dollar investments, at least in the long-term: bringing the trade deficit down, given the small US export sector, ultimately probably requires a big depreciation in the dollar, lowering the real return foreigners receive on their dollar investments.

I don't think the funds from abroad will keep rolling in forever, but external financing constraints certainly have not proved binding this year.   There are too many Chinese reserves and petrodollars sloshing around.


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