RGE - Malpass on the US trade deficit …
リンク: RGE - Malpass on the US trade deficit ….
Tis the season to be compassionate.
And I guess that also applies to those who are allowed to grace the Wall Street Journal’s oped page –
The opinions there rarely come as much of a surprise. One standard critique of the blogosphere is that it brings together people who already agree to reinforce their pre-existing convictions.
That hardly seems to be feature unique to blogland: the Wall Street Journal oped page has long served a similar function. But I was still surprised by the Malpass WSJ oped -- an oped that strongly suggests that the US trade deficit reflects surging business investment in the US, financed by aging, slow growing Europe and Japan.
“the trade deficit and related capital inflow reflect U.S. growth, not weakness -- they link the younger, faster-growing U.S. with aging, slower-growing economies abroad …
The trade deficit is the mechanism allowing consumption and investment in the U.S.to grow faster than in Europe and Japan. The issue for the U.S. is whether it's worth the interest costs. It's the same question facing a small business: Should it borrow money to expand the payroll, train employees, buy land and machines, conduct R&D, build inventory? Profit and credit-worthiness help make the decision.” (Emphasis added)
Malpass is careful not to attribute the rise in the US current account deficit entirely to a surge in business investment. He talks of the increase in "consumption and investment" not of the increase in investment alone. But the analogy between a small business looking for external financing and the US isn't an accident either. Malpass very explicitly argues that the US external deficit doesn't reflect US profligacy. In his view, it is a sign of the strength of the US economy.
Maybe.
But I am pretty sure that the US deficit doesn't stem from strong business investment -- and am quite sure that the recent rise in the the US deficit hasn't been financed by Europe and Japan.
Rigt now, businesses are saving more than they invest, and so they are on net contributing to the United States national savings. That is one of the unusual features of the current situation.
The US savings shortfall comes from the fact that the US government still spends more than it takes in, even if the gap today is a bit smaller than it was in 2004. Above all, though, the gap stems from households that don’t save any of their current income. That means household sector that has to borrow to finance its investment in residential real estate.
The Wall Street Journals oped page would never rely on a French bank for data analysis. But I still would recommend the charts showing the decomposition of the US savings gap that Philippe d’Arvisenet of BNP Paribas has pulled together (see p. 4). The Paribas charts illustrate -- using data ultimately put out by the Fed, not by the French government -- the contribution of different sectors in the US to net national savings.
And then there is the little matter of who is financing the US. Tis true that a decent chunk of the inflows financing the US must be coming from old, slow growing Japan. But Japan has run a current account surplus that has helped finance the US – at least when it wasn’t financing other Asian economies -- for quite some time now. The rise in the US deficit since 2002 doesn’t primarily reflect a rise in Japan’s current account surplus.
Nor does it reflect a rise in Europe's surplus. Last I checked both the UK and the Eurozone as a whole were running current account deficits – and thus not financing the US, at least not in aggregate. For that matter, old Europe is now growing about as fast, if not faster, than the US.
So who is financing the US?
The IMF’s data shows (see Table 1.2, p. 12 of Chapter 1 of the WEO) a huge surge in the current account surplus of the emerging world -- a surge that has financed the surge in the US current account deficit. Ben Bernanke, incidentally, tends to agree with the IMF.
And whatever else you want to say about the world’s emerging economies, they aren’t growing slowly.
- Some – Russia – are already urbanized, rapidly aging and growing rapidly.
- Some – Saudi Arabia – are already urbanized, young and growing rapidly.
- Some – China – are urbanzing, aging and growing rapidly. To be totally fair, Malpass does mention the China (best I can tell, it is the only emerging market that Malpass mentions). He links China’s aging to its demand for US bonds. He just leaves out that it doesn’t quite fit the “slow-growing” part of his argument.
- Some – India – are young, urbanizing and growing rapidly.
There are of course exceptions to the "rising surpluses in the emerging world financing the US deficit" story. India, for example, doesn’t run a current account surplus, so technically its savings surplus doesn’t finance the US.
But even India is attracting a lot more private capital than it needs to finance its own current account deficit. As a result, India's central bank certainly does help finance the US deficit. The RBI transforms foreign demand for Indian assets into Indian demand for US bonds.
I don't think there is much doubt -- at least among informed observors -- that fast growing emerging economies are a key source of financing for the US. Nor is there much doubt that a large share of that financing comes not from private investors, but from central banks and oil investment funds. It isn't clear that the US has been the most attractive place in the world for private investment over the past few years -- in dollar terms, returns on investment in the US have lagged returns on investment in Europe. But few would doubt that the US has attracted more financing than anyone else from emerging market central banks over the past few years.
One of the stereotypes about blogs is that they live in the realm of opinion, a realm divorced from the facts. I am pretty sure that isn’t a vice limited to the blogosphere.
Update: Ben Stein's writes in the Sunday Times:
"Why is it [the cost of money] so low? Because the Chinese people save about 40% of what they earn and use a lot of it to buy United States Treasury securities, keeping overall interest rates low. The Japanese do the same, and so do the immensely wealthy petro-states ... savings in Guangdong China mean mansions in Greenwich, Conn."
This stuff isn't all that hard!
Comments
Mr. Setser,
Merry Christmas to you.
Thanks for a year of consistent and informative postings.
Merry Christmas to you.
Thanks for a year of consistent and informative postings.
Written by PC on 2006-12-23 02:11:02
"...NYC & Co's head of tourism development, Fred Dixon, said: "Brits are probably the savviest travellers in the world - they're keenly aware of the value of their currency. They're very comfortable in New York - the language is the same, there are cultural ties and it's good value."... Britain accounts for far more visitors to New York than any other nation - more than 1.2m British tourists are expected this year, outnumbering their closest rivals, the Germans, by three to one."
http://business.guardian.co.uk/story/0,,1977132,00.html
http://business.guardian.co.uk/story/0,,1977132,00.html
Written by Guest on 2006-12-23 06:48:42
Anon said: "They're very comfortable in New York - the language is the same, there are cultural ties and it's good value."
NY'er Speaking To London Cabbie: "Wow, isn't London great?? It has all the best things of New York with out the bad ones"
London Cabbie to NY'er: "Funny that....I was going to say the same thing about NY in comparison to London...."
As for Malpass' op. ed., his Panglossian spin on every detail reminds one of the most cynically evasive of corporate double-speak (e.g. "outsourcing" for "moving jobs to China", "downsizing" for "You're fired".). It's paradoxical how conservatives despise 'political correctness' around college campuses etc. yet thrive on it when it comes to evading the facts on the ground in economics.
NY'er Speaking To London Cabbie: "Wow, isn't London great?? It has all the best things of New York with out the bad ones"
London Cabbie to NY'er: "Funny that....I was going to say the same thing about NY in comparison to London...."
As for Malpass' op. ed., his Panglossian spin on every detail reminds one of the most cynically evasive of corporate double-speak (e.g. "outsourcing" for "moving jobs to China", "downsizing" for "You're fired".). It's paradoxical how conservatives despise 'political correctness' around college campuses etc. yet thrive on it when it comes to evading the facts on the ground in economics.
Written by Cassandra on 2006-12-23 09:06:55
"...A lot of the success is based on low tax rates in the UK, low-key regulation and an "open house" policy to any overseas corporation that wants to take over a UK financial institution (if they can find any left that are still home-owned). The Japanese... call this Wimbledonisation: don't worry that you never produce a domestic winner because you are cleaning up by holding the tournament..."
http://business.guardian.co.uk/economicdispatch/story/0,,1976082,00.html
http://business.guardian.co.uk/economicdispatch/story/0,,1976082,00.html
Written by Guest on 2006-12-23 09:43:51
Aaron -- thanks for the link; you were less diplomatic than I. One small point -- I think Rajan and Prasad of the IMF get credit for first talking about the 'uphill' flow of capital. I just adopted the term, because it is evocative and nice shorthand.
Written by bsetser on 2006-12-23 10:32:10
Brad,
I'll leave the diplomacy to you; you actually get paid to do this stuff ;)
But nonetheless thanks for your ongoing, high-quality work.
I'll leave the diplomacy to you; you actually get paid to do this stuff ;)
But nonetheless thanks for your ongoing, high-quality work.
Written by Aaron Krowne on 2006-12-23 10:44:47
The only growth to speak of is in the demand for assets by populations aging faster than the US. It does mean we probably won't see balanced trade for the foreseeable future.
Written by Lord on 2006-12-23 11:06:13
i don't see a huge net demand for US assets out of aging europe (large gross flows, but not more european demand for us assets than us demand for european assets)right now. Nor do i see Chinese residents demandig US assets rather than Chinese bank deposits as they save for their retirement. RMB deposits may only pay 2% and change, but the RMB is expected to appreciate, and US $ assets are not ... the real growth in demand for assets in the past three years has come from some combination of China's central bank and the oil exporters. and the increase in demand from oil exporters isn't an aging story. it is a revenues surged and we don't believe this will last story. i think spending tho is starting to ratchet up significantly ... so the extraordinary demand we witnessed over the past couple of years may not last.
Written by bsetser on 2006-12-23 11:36:28
It's par for the course over at the WSJ. Does Malpass actually make decisions about strategy at Bear Stearns? He's as bad as Kudlow--so much bloviation, so little relevant evidence. Align the analogy with the real facts and the story is one of a "small business" in the red, getting in deeper and deeper to some not so friendly creditors.
Written by Jim M on 2006-12-23 20:55:53
I would like to add my thanks for the many insightful articles that you have posted.
Written by touche on 2006-12-23 21:29:30
Mr. Setser,
Kudos for the excellent work you do here.
Merry Christmas!
Peter Schaeffer
Kudos for the excellent work you do here.
Merry Christmas!
Peter Schaeffer
Written by Peter Schaeffer on 2006-12-24 22:05:21
China's central bank centralizes those savings in American paper. Japan and Europe prefers real assets to paper ones and build plants here. The Gulf states are different though in that it is an exchange of assets; we burn theirs and they hope to burn ours sometime in the future. They don't have to concern themselves with financial exchange rates when they control asset exchange rates through the price of oil.
Written by Lord on 2006-12-26 00:28:34
Here's my skewering of him.