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					  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

				
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