from Follow the Money

Rising trade deficit financed by fast-growing poor countries watch

March 1, 2006

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Consumption up.   Up by almost 1% in a month.   Consumption continues to grow faster than income.    Household savings, consequently, are down.  

 Michael Mandel, are you sure you want to argue that surging consumption (and falling savings rates) has little to do with the rising US current account deficit?

Japanese car sales in February up.  US car sales in February down.  

Japanese firms make cars in the US.  But I suspect they use a few more imported parts than American-owned firms.    And isn't every Toyota or Honda sold in the US a Japanese intangible export (and a US intangible import)?  With the yen/ dollar at 115, I suspect Japanese car makers are making money on both their tangible and intangible exports.  The yen/ dollar isn't the only reason Japanese sales are up - all ten of the cars recommended by Consumer Reports are produced by Japanese firms.    But it doesn't help. 

Last time the US trade deficit fell is a big way, a big fall in the dollar that led Japanese firms to shift (some) automobile production to the US played a significant role the adjustment process.   That isn't happening right now, at least not on a large enough scale.  Last I checked, both transplants and imports were up.

And I would be rather surprised if productivity in the US-owned auto sector had grown faster than in the German and Japanese auto sectors.    Super-efficient big box retailing may increase overall US productivity, but big box retailers like Walmart are not exactly a big source of export revenues.

Maybe I am discounting Walmart's intangible exports from its non-US operations ...  but I sort of suspect Walmart's intangible exports they are quite small relative to Walmart's tangible import bill.

I would be a bit more sympathetic to Mandel's argument that productivity differentials were driving the rise in the trade deficit if there was more evidence that private investors abroad were scrambling all over themselves to actually buy US equities to get their piece of the US productivity miracle.  That was the case in late 1990s.  But right now, what foreigners want to buy we in the US don't want to sell.

The net flow of equities (portfolio equity and FDI) is out of the US.

And right now, it is into emerging markets - a fact that the FT (a British intangible export) usefully highlights

Private investors are chasing fast productivity growth.  Just in China.   And a few other places - though I am not sure if investors in Brazil are chasing productivity growth or Chinese demand for Brazilian iron and soybeans.

Private investors over the past few years have consistently wanted to finance current account deficits in emerging economies (along with small deficits in the US). 

Suffice to say that all the capital flowing to emerging economies hasn't gone to finance current deficits (investment in excess of savings).  It has gone to reserves.

The big inflows finance big reserve increases.   China hasn't reported its January reserve data, but if rumors of a big number are accurate, total reserve accumulation in the emerging world probably was over $60b in January.   And that increase came even as Argentina paid $10b back to the US.  The February increase will be smaller, but will come in the face of signficant debt buybacks as well. $60b in a month is $720 b in a year - or about as much as the Japan and everyone else added to their reserves back at the peak of Japanese intervention.   It is an absolutely phenomenal sum.

I keep harping on it because it is, in my view, that important.   The broad flow of capital right now is not being determined by private investors, but rather by central banks.  Their reserve buildup - an outflow - overwhelms large private inflows.

I don't think productivity differentials can explain why China is financing the US, or, for that matter, why the rise in the US current account deficit over the last ten or so years has been matched by a rise in the surpluses of emerging economies.

I am critical of parts of Mike Dooley's argument, but I think he (along with Peter Garber and David Folkerts-Landau) got what Mandel calls the "big facts"  right when they put forward their Bretton Woods 2 hypothesis.   Any attempt to explain the US current account deficit has to explain why emerging economies are running surpluses, and why they are providing big time financing the US - not why Japan and Europe are financing the US on a rather small scale. 

And an inability to attract private capital because of low productivity growth isn't it. 

Private capital flows to emerging markets are back to their pre-crisis (1997) levels.  More on that later, but trust me, I ain't making it up.  It is all in the data tables at the back of the IMF's WEO.

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