Get documents about "Forecasting
Document Sample
Trade Deficit, Interest Rates and Dollar
Dr. Rajeev Dhawan
Director
ECONOMIC Prepared for
International Business 8190
FORECASTING
General Classroom Bldg. 327
CENTER September 7th, 2005
Office: 404-651-3291
email: forecast@gsu.edu
http://www.robinson.gsu.edu/efc
The Good, the Bad, and the Ugly
Sector or Area Grade
Construction A++
Tax Collections A+
Real Dividend Growth A+
Bank Loan Activity A+
Corporate Revenue Growth A
Health/Finance/Insurance Jobs A
Weak Dollar (Earnings) B+
Overall Job Growth B+
Euro Zone Malaise C
Oil Prices C
Benefit/Health Costs D
Manufacturing Jobs D
Auto Over-Capacity F
Iraq/Terrorism F
Overall US Economy A-
Trade Deficit: Should We Worry?
(Bil. $)
0
-200
-400
-600
Almost 6% of GDP!
-800
-1000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
The World’s Growth Imbalance
(%) UNITED STATES GERMANY JAPAN
5
4
3
2
1
0
-1
2001 2002 2003 2004 2001 2002 2003 2004 2001 2002 2003 2004
Real GDP Net Export Contribution
Source: Global Insight, EFC
Federal Budget, Trade Deficits and
US dollar trade-weighted exchange rate
(Bil. $) Index 2000 = 100
200 140
130
0
120
-200
110
100
-400
90
-600
80
-800 70
1976 1980 1984 1988 1992 1996 2000 2004
Budget Deficit Trade Deficit U.S. Dollar Exchange Rate
Today’s Special: Conundrums
Why Haven’t Record Trade-Deficits
Produced a Dollar Meltdown?
Why is the 10-Year Rate
Falling Despite the FED’s 8
Rate Hikes?
Why Hasn’t Housing Moderated?
High Trade Deficit Numbers
Keep US Long Term Bond
Rates Low Which Fuels the
Housing Boom!
NIPA Definition of GDP
Y=C+I+G+NX
Y = GDP
C = Consumption
I = Investment
G = Government Purchases
NX = Net Exports = Exports-Imports
Exports Share
(%)
12
10
8
6
4
1963 1968 1973 1978 1983 1988 1993 1998 2003
Imports Share
(%)
16
14
12
10
8
6
4
2
1963 1968 1973 1978 1983 1988 1993 1998 2003
Net Exports
(%)
2
0
-2
-4
-6
1963 1968 1973 1978 1983 1988 1993 1998 2003
Savings and National Income Math
GDP has been defined as:
Y = C + I + G + NX
Rearranging terms gives:
Y - C - G = I + NX
The left-hand side, which is the nation's
income (GDP) leftover after consumption
and government spending, is defined as
National Savings "S":
S = I + NX
Savings and National Income Math
Trade Deficit (NX) =Net Capital Outflow
(NCO)
– If NX >0 implies lending abroad
– If NX<0 implies borrowing from abroad
S=I+NCO
S+{-NCO}=I
– Investment= Domestic Savings +Net Capital
Inflow
Net Foreign Investments and US Trade Deficit
(Annualized and Smoothed)
($. Bil) ($. Bil)
0 0
-100 -100
-200 -200
-300 -300
-400 -400
-500 -500
-600 -600
-700 -700
93 94 95 96 97 98 99 00 01 02 03 04
Inv estments Trade Deficit (Right)
TRADE DEFICIT
Chairman
Alan Greenspan
March 10th, 2005
“Through much of the post-World War II years,
domestic saving for each country was invested
predominantly in its domestic capital assets, even
when there existed the potential for superior risk-
adjusted returns from abroad.
…But in the early 1990s, "home bias" began to
diminish appreciably, and, hence, the dispersion of
current account balances among countries has
increased markedly.”
“It is evident that the greater the degree of
international flexibility, the less
the risk of a crisis.”
International Trade Balance (2004)
Country Exports Imports Net Their Current a/c
Balance as % of GDP
Canada 190.2 255.9 -65.8 2.9%
Euro Area 127.1 210.1 -82.9 0.8%
Mexico 110.8 155.8 -45.1 -1.2%
Japan 54.4 129.6 -75.2 3.4%
United Kingdom 36.0 46.4 -10.4 -2.0%
China 34.7 196.7 -162.0 2.4%
Germany 31.4 77.2 -45.9 4.4%
Korea 26.3 46.1 -19.8 3.1%
Netherlands 24.3 12.6 11.7 2.9%
Taiwan 21.7 34.6 -12.9 6.9%
France 21.2 31.8 -10.6 -0.6%
Australia 14.3 7.5 6.7 -5.3%
In Billions of Dollars
TRADE DEFICIT
Governor
Ben S. Bernanke
March 10th, 2005
“Essentially by definition, in each period U.S. net foreign borrowing equals
the U.S. current account deficit, which in turn is closely linked to the
imbalance in U.S. international trade.”
“…inadequate U.S. national saving is the source of the current account
deficit must be true at some level; indeed, the statement is almost a
tautology.”
“I see as the emergence of a global saving glut in the past eight to ten
years.”
“As a consequence of high desired saving and the low prospective returns
to domestic investment, the mature industrial economies as a group seek
to run current account surpluses and thus to lend abroad.”
“…global supply of saving is the recent metamorphosis of the developing
world from a net user to a net supplier of funds to international capital
markets.”
Global Current Account Balances
(Billions of U.S. Dollars)
Countries 1996 2003 Countries 1996 2003
Industrial 46.2 -342.3 Developing -87.5 205.0
United States -120.2 -530.7 Asia -40.8 148.3
Japan 65.4 138.2 China 7.2 45.9
Euro Area 88.5 24.9 Hong Kong -2.6 17.0
France 20.8 4.5 Korea -23.1 11.9
Germany -13.4 55.1 Taiwan 10.9 29.3
Italy 39.6 -20.7 Thailand -14.4 8.0
Spain 0.4 -23.6 Latin America -39.1 3.8
Other 12.5 25.3 Argentina -6.8 7.4
Australia -15.8 -30.4 Brazil -23.2 4.0
Canada 3.4 17.1 Mexico -2.5 -8.7
Switzerland 21.3 42.2 Middle East and Africa 5.9 47.8
United Kingdom -10.9 -30.5 E. Europe and ex-USSR -13.5 5.1
Source: Remarks by Governor Ben S. Bernanke, March 10, 2005
The Bill Gross View
“The Fed controls short rates. Intermediate
and long rates are determined by
institutions, individuals and foreign central
banks, such as China’s, which have been
massive buyers of Treasuries.”
- Bill Gross
Founder and Chief Investment Officer
Pimco, Newport Beach, Calif.
Source: Barron’s, January 19, 2004
How China Runs the World Economy
EXPORTS: EXPORTS:
$94.5 (16.2%) EXPORTS: EXPORTS: $23.3 (4.0%)
IMPORTS: $72.3 (12.4%) $25.7 (4.4%) IMPORTS:
$40.9 (7.4%) IMPORTS: IMPORTS: $29.8 (5.4%)
$88.9 (16.1%) $57.4 (10.4%)
EXPORTS:
132.9 (22.8%)
Hong Kong Japan IMPORTS:
S. Korea Germany
42.5 (7.7%)
EXPORTS: EXPORTS: EXPORTS: EXPORTS:
$45.6 (17%) $122.3 (22.7%) $44.6 (17.8%) $78.6 (8.8%)
IMPORTS: IMPORTS: IMPORTS: IMPORTS:
$14.6 (5.3%) $56.3 (14%) $27.2 (12.7%) $46.6 (6.5%)
Source: CIA Fact book
TRADING GIANT
Country Total Trade Export Import Deficit/Surplus
($. Billions)
Japan 133.5 59.4 74.1 - 14.7
United States 126.5 33.9 92.6 58.7
Hong Kong 87.4 11.1 76.3 65.2
South Korea 63.2 43.1 20.1 - 23.0
Taiwan 58.4 49.4 9.0 - 40.4
Germany 41.7 24.3 17.4 - 6.9
Malaysia 20.1 14.0 6.1 - 7.9
Singapore 19.4 10.5 8.9 - 1.6
Russia 15.7 9.7 6.0 - 3.7
Netherlands 15.4 1.9 13.5 11.6
Trade and Holding of US Treasuries
by Central Banks
Trade in Goods and Services U.S. Treasury Securities Holdings Currency
As of 2004 Change As of 2004 Change Appreciation
Japan -75.2 -9.3 702 353.7 4.3
China -162 -38.1 196 49.4 0.0
South Korea -19.8 -6.9 67.1 8.6 13.4
Taiwan -12.9 1.2 59.1 18.2 6.7
Hong Kong 6.5 1.8 52.9 22.7 0.0
Singapore 4.3 2.9 26.9 4.1 4.1
Germany -45.8 -6.6 59.5 19.5 8.0
UK -10.4 -1.7 171 124.0 7.1
In one year Japanese Bought
$350+ Bil. worth of Treasuries to
Keep their Currency from Appreciating
* All numbers are in billions of U.S. dollars
Source: BEA (Trade) and US Treasury Department
Net Foreign Purchases of U.S. Financial Instruments
($. Bil)
500
T-Bonds
Global Savings Glut
400
Is Showing up in T-Bond Holdings
300
Corp. Bonds
200
100
0
Stocks Agency
-100
-200
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
Source: FRB Flow of Funds Data
Dollar Depreciation Against Yen and Won
Since January 2004
(%)
20
Korea is the Loser in this Battle
15
Won
10
5
0
Yen
-5
-10
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY
2004 2005
2004 US Balance in International Trade
What We Buy From Them What They Buy From Us*
Crude Oil -135.7 Airplanes 13.2
Vehicles -123.2 Chemicals (Plastic) 10.9
Clothing -67.9 Airplane parts 10.5
Home Electronics -67.8 Soybeans 6.6
Office Electronics -65.6 Corn 6.0
Petroleum Preparations -28.3 Wheat 5.0
Furniture and Bedding -23.7 Scientific Instruments 4.5
Natural Gas -21.1 Cotton 4.2
Electrical Machinery -20.2 Metal ores 3.2
Toys, Sporting good -19.1 Animal Feeds 3.0
* Billions of Dollars
Source: US Bureau of Economic Analysis
2002 Passenger Car Production and Sales
Country Production Sales Deficit/Surplus
Japan 8,117,563 4,289,683 3,827,880
Germany 5,301,189 3,341,718 1,959,471
U.S. 4,879,119 8,422,625 -3,543,506
France 3,181,549 2,254,732 926,817
S. Korea 2,471,444 1,065,161 1,406,283
Spain 2,211,172 1,437,192 773,980
Brazil 1,495,622 1,295,119 200,503
U.K. 1,492,365 2,458,769 -966,404
Canada 1,274,853 868,188 406,665
Mexico 1,000,715 667,565 333,150
China 703,521 780,604 -77,083
India 573,808 601,321 -27,513
Sweden 251,035 246,581 4,454
Source: Ward’s World Motor Vehicle Data
10-Year Bond Rate and Trade Deficit
10-Year Bond Regression
Source: May 2005, Forecast of the Nation
Economic Fallacies & Forecasting Truths
Trade Deficit is a Bad Thing
-Paper Money Vs. Goods: INFLATE AWAY!
-New Gold Brick of the World is the Dollar -
Export-Led Growth Strategy of East Asia &
China is the New Player on the World Stage
-Deficits Matter for Long Term Growth But We
are All Dead in the Long Run!
DIAMOND OF MONEY
COMMERCIAL
REAL ESTATE
REAL ESTATE
INTEREST TRADE DEFICIT
RATES
JOB GROWTH
CONFIDENCE OIL EURO
But What About the value
of the Dollar?
The Meryl Witmer View
“If the dollar is low enough, the
world can get its plastic surgery
here.”
- Meryl Witmer
General partner
Eagle Capital Partners, N.Y.
Source: Barron’s, January 19, 2004
China: Threat or
Opportunity?
China’s Manufacturing Wage Competitiveness
(Manufacturing wages, $ per hour, 2001)
Japan
United States
Europe
Singapore
Korea
Taiwan
Mexico
United States: $16.14
China: $0.61
Brazil
China
0 2 4 6 8 10 12 14 16 18
Sources: U.S. Bureau of Labor Statistics, China’s National Bureau of Statistics
Source: Global Insight World Industry Service
What is Role of Chinese Exports
in World Trade?
Greater China Manufacturing Exports
(Percent share of total world manufacturing exports)
14
12
10
8
6
4
2
0
1980 1990 1995 2000 2005
China* Hong Kong* Taiwan* Intra-Regional
* Export totals from China, Hong Kong and Taiwan exclude trade with each other. These are
included in Intra-Regional.
Source: Global Insight World Industry Service
Education, Science, and
Technology in China
China U.S.
Literacy Rate 86% 97%
High School Graduates (aged 25+) 18% 84%
College Graduates (aged 25+) 5% 26%
University Students (per 1,000 people) 5.6 54.1
Personal Computers (per 1,000 people) 19 625
Scientific & Technical Journal Articles 11,675 163,526
Secure Internet Servers 184 78,126
Internet Users (per 1,000 people) 26 501
Source: Federal Reserve Bank of Dallas, Southwest Economy, Sept./Oct. 2003
China’s Three Serious Structural
Problems
State Sector Inefficiencies
(Share in)
1995 Urban Emp: 57%
1995 Production: 34%
Banking Fragility
(NPL--% of Total Loans) Fiscal Weakness
(Gov. Rev.--% GDP)
Official: 25%
Unofficial: 50%+ 1985: 21%
(or higher?) 1995: 11%
Source: Global Insight World Industry Service
What’s Happening to China’s GDP
Statistics?
Source: Thomas Rawski, University of Pittsburgh Paper 2001
What’s Happening to China’s GDP
Statistics?
Source: Thomas Rawski, University of Pittsburgh Paper 2001
China Net-Net
Manufacturing Advantage to China
Unless We Stop Shopping at Walmart,
Which is Similar to Bleeding the Vein to
Cure a Fever!
Technology Advantage to US Unless Our
CEO’s/Marketing People Mortgage the
Future For a Song by Selling Technology
Rights
Anonymous Ventor
My girlfriend demanded that I
take her to someplace expensive,
so I took her to a gas station
Source: AJC, April 21st, 2005
A Snapshot of the US Oil Market in 2001
Consumption (Mbd) Production (Mbd) Imports (Mbd)
19.63 7.72 11.62
Source Country Imports (Mbd) Production (Mbd)
Saudi Arabia 1.66 (14.3%)* 8.77 (11.8%)**
Venezuela 1.54 (13.2%)* 3.42 (4.9%)**
Nigeria 0.88 (7.6%)* 2.15 (2.9%)**
Iraq 0.80 (6.8%)* 2.41 (3.3%)**
Algeria 0.28 (2.3%)* 1.56 (1.8%)**
*= % of US imports, **= % of world production
Source: 2001 BP Statistical Review of World Energy, US Energy Information Agency
Can We Blame China for High Oil Prices?
NET Change
Production (P) Consumption (C) in Supply
2000 2004 DP 2000 2004 DC (DP – DC)
US 7.73 7.24 -0.49 19.70 20.52 0.82 -1.31
Canada 2.72 3.09 0.36 1.94 2.21 0.27 0.10
Mexico 3.45 3.82 0.37 1.88 1.90 0.01 0.36
Japan NA NA NA 5.58 5.29 -0.29 0.29
UK 2.67 2.03 -0.64 1.70 1.76 0.05 -0.69
China 3.25 3.49 0.24 4.99 6.68 1.70 -1.46
India 0.78 0.82 0.04 2.25 2.56 0.30 -0.26
Russia 6.54 9.29 2.75 2.47 2.57 0.10 2.65
Middle East 23.38 24.57 1.19 4.60 5.29 0.69 0.51
Africa 7.86 9.26 1.41 2.46 2.65 0.19 1.22
VIN* 8.13 7.29 -0.84 1.75 1.94 0.19 -1.03
* VIN – Venezuela, Indonesia, Norway
Source: BP Statistical Review of World Energy, June 2005
1. Improve fuel economy
2. Ramp up spending on alternative
fuels
3. Redouble commitment to
efficiency ~
4. Get serious about solar and
wind Yeah, yeah…
5…
Source: Fortune, August 23, 2004
History of Energy
Coal Displaced Wood in 19th Century
Oil Displaced Coal in 20th Century
? Displaced Oil in 21th Century
