Transcript Forecasting - Rajeev Dhawan

Trade Deficit, Interest Rates and Dollar
Dr. Rajeev Dhawan
Director
ECONOMIC
FORECASTING
CENTER
Prepared for
International Business 8190
General Classroom Bldg. 327
September 7th, 2005
Office: 404-651-3291
email: [email protected]
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
5
(%)
UNITED STATES
GERMANY
JAPAN
4
3
2
1
0
-1
2001
2002
2003
2004
2001
Real GDP
2002
2003
2004
2001
Net Export Contribution
Source: Global Insight, EFC
2002
2003
2004
Federal Budget, Trade Deficits and
US dollar trade-weighted exchange rate
(Bil. $)
200
Index 2000 = 100
140
130
0
120
-200
110
100
-400
90
-600
80
-800
70
1976
1980
1984
Budget Deficit
1988
1992
Trade Deficit
1996
2000
2004
U.S. Dollar Exchange Rate
Today’s Special: Conundrums
Why Haven’t Record Trade-Deficits
Produced a Dollar Meltdown?
Why is the 10-Year Rate
Falling Despite the FED’s 8
Rate Hikes?
Why Hasn’t Housing Moderated?
High Trade Deficit Numbers
Keep US Long Term Bond
Rates Low Which Fuels the
Housing Boom!
NIPA Definition of GDP
Y=C+I+G+NX
Y = GDP
C = Consumption
I = Investment
G = Government Purchases
NX = Net Exports = Exports-Imports
Exports Share
(%)
12
10
8
6
4
1963
1968
1973
1978
1983
1988
1993
1998
2003
Imports Share
(%)
16
14
12
10
8
6
4
2
1963
1968
1973
1978
1983
1988
1993
1998
2003
Net Exports
(%)
2
0
-2
-4
-6
1963
1968
1973
1978
1983
1988
1993
1998
2003
Savings and National Income Math
GDP has been defined as:
Y = C + I + G + NX
Rearranging terms gives:
Y - C - G = I + NX
The left-hand side, which is the nation's
income (GDP) leftover after consumption
and government spending, is defined as
National Savings "S":
S = I + NX
Savings and National Income Math
Trade Deficit (NX) =Net Capital Outflow
(NCO)
– If NX >0 implies lending abroad
– If NX<0 implies borrowing from abroad
 S=I+NCO
 S+{-NCO}=I
– Investment= Domestic Savings +Net Capital
Inflow
Net Foreign Investments and US Trade Deficit
(Annualized and Smoothed)
($. Bil)
0
($. Bil)
0
-100
-100
-200
-200
-300
-300
-400
-400
-500
-500
-600
-600
-700
-700
93
94
Inv estments
95
96
97
98
Trade Deficit (Right)
99
00
01
02
03
04
Chairman
Alan Greenspan
TRADE DEFICIT
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 riskadjusted 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
Balance
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
Their Current a/c
as % of GDP
Governor
Ben S. Bernanke
TRADE DEFICIT
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
46.2
-342.3
Developing
-87.5
205.0
-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
-39.1
3.8
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
Industrial
United States
Other
Latin America
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:
$94.5 (16.2%)
IMPORTS:
$40.9 (7.4%)
Hong Kong
EXPORTS:
$45.6 (17%)
IMPORTS:
$14.6 (5.3%)
EXPORTS:
$72.3 (12.4%)
IMPORTS:
$88.9 (16.1%)
Japan
EXPORTS:
$25.7 (4.4%)
IMPORTS:
$57.4 (10.4%)
EXPORTS:
132.9 (22.8%)
IMPORTS:
42.5 (7.7%)
EXPORTS:
$122.3 (22.7%)
IMPORTS:
$56.3 (14%)
Source: CIA Fact book
EXPORTS:
$23.3 (4.0%)
IMPORTS:
$29.8 (5.4%)
S. Korea
Germany
EXPORTS:
$44.6 (17.8%)
IMPORTS:
$27.2 (12.7%)
EXPORTS:
$78.6 (8.8%)
IMPORTS:
$46.6 (6.5%)
TRADING GIANT
Country
Total Trade
($. Billions)
Export
Import
Deficit/Surplus
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
400
T-Bonds
Global Savings Glut
Is Showing up in T-Bond Holdings
300
Corp. Bonds
200
100
0
Agency
Stocks
-100
-200
90
91
92
93
94
95
96
97
98
Source: FRB Flow of Funds Data
99
00
01
02
03
04
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
Japan
8,117,563
4,289,683
Germany
5,301,189
3,341,718
Deficit/Surplus
 3,827,880
 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
RATES
TRADE DEFICIT
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
United States: $16.14
China: $0.61
Mexico
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
China*
1995
Hong Kong*
Taiwan*
2000
2005
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
11,675
163,526
184
78,126
26
501
Scientific & Technical Journal Articles
Secure Internet Servers
Internet Users (per 1,000 people)
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%+
(or higher?)
1985: 21%
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?
Production (P)
NET Change
in Supply
Consumption (C)
2000
2004
DP
2000
2004
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
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
Middle East
* VIN – Venezuela, Indonesia, Norway
Source: BP Statistical Review of World Energy, June 2005
(DP – DC)
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