Transcript Document

A Bird Eye View
of International Liquidity:
J.D. Han
King’s University College, UWO
1
I. Summary Version
2
U.S. and E.A. have dove-taling
National Income Account
At equilibrium, C + S + T = C + I + G + X-M.
East Asian Countries’ GNP
C + S + T > C + I + G and thus X – M>0
U.S.’s GNP
C + S + T < C + I + G and thus X – M<0
3
East Asian Countries’ GNP
C + S + T > C + I + G and thus X – M>0
S + T-G > I
National Savings (Private Savings S + Public
Savings T-G) exceeds Investment.
X-M >0 and NX becomes Net Capital Outflows
4
U.S.’s GNP
C + S + T < C + I + G and thus X – M<0
S + T-G < I
National Savings (Private Savings S + Public
Savings T-G) falls short of Investment.
X-M <0 and -NX becomes Net Capital Inflows
5
1. Current Fundamentals of World Economy
(U.S.)
Investment
on High
Tech
(Asia, etc.)
Lack of
Investment
Growth
Government
Budget Deficits
rises;
Public Savings
lags
Consumption
Rises;
Privatge
Savings lags
Managed
FOREX
Export
Promotion
s
National
Savings
Glut
Capital Flows
ㅇ low interests
9.11;
wars
ㅇ Asians buying U.S.
finan/real Assets
Current
Account
Deficits
(offsetting)
Current
Account
Surplus
External Liability
Position Imbalance
Current Account
Imbalance
6
II. Full Version
7
Sources of Global Liquidity

1)
2)
3)
3 Major Sources of Global Liquidity
Developed Countries’ accumulated Pension
Funds
Oil Money
Trade Surplus of U.S.’s partner countries,
mainly, China (call it separately ‘U.S. dollar
liquidity’).
8

The 3rd one or ‘U.S. Dollar
Liquidity’ is the most interesting as
it is related to the domestic (U.S.)
economic and monetary
conditions.
9
1. Current Fundamentals of World Economy
(U.S.)
Investment
on High
Tech
(Asia, etc.)
Lack of
Investment
Growth
Government
Budget Deficits
rises;
Public Savings
lags
Consumption
Rises;
Privatge
Savings lags
Managed
FOREX
Export
Promotion
s
National
Savings
Glut
Capital Flows
ㅇ low interests
9.11;
wars
ㅇ Asians buying U.S.
finan/real Assets
Current
Account
Deficits
(offsetting)
Current
Account
Surplus
External Liability
Position Imbalance
Current Account
Imbalance
10
2. Flows of Goods,
and Money in opposite directions
U.S. is a voracious absorber of world products
particularly from the East Asia; Socio-political
stability of U.S. depends on mass consumption.
U.S. Trade Decifits (Import in excess of Exports)
has been the largest and increasing rapidly while
the East Asian countries have been accumulating
Trade Surplus with U.S.
- International Currencies(monies) flow to the East
Asia
The East Asia is becoming the ‘Factory of the
World’
11
U.S. Trade Deficits are increasing.
World: Current Account Trends of Major Countries
(100 Million $)
1987
1997
2004
-1,607
-1,409
-6,681
EU 15
Countries
252
883
477
Japan
844
968
1,721
Asia 7
Countries1)
284
367
1,678
(China)
3
370
687
(Taiwan)
180
71
186
(Korean)
101
-84
276
Latin America
-98
-668
173
-73
141
909

U.S.




Middle East
OPEC

Note: 1) China, Taiwan, Korea, Singapore, Malaysia, Thailand, and Indonesia
Data : IFS, Bloomberg
12
Current Account Trends of U.S.: ‘Ever Increasing’
100
(billion S)
(%)
1
0
0
-100
-1
-200
-2
-300
-3
-400
-4
-500
-5
-600
Current Account Balance
-6
-700
Current Accout Bal./GDP
-7
-800
-8
-900
-9
80
82
84
86
88
90
92
94
96
98
00
02
04
*There is a big decrease in CA deficits to $390 billions in
13
2009 due to recession.
U.S. is actually the only country which can afford to have
perpetual trade deficits:
(100 million U.S. $; %)
1987
10 Largest Deficits
2004
-2,254
(84.5)
10 Lagest Deficits
-1,607
(60.2)

U.S.
Canada
-134
(5.0)


U.K.
-126
(4.7)

Saudi Arabia
-98

Australia

-8,719
(92.9)
-6,681
(71.2)
Spain
-492
(5.2)

U.K.
-419
(4.5)
(3.7)

Australia
-400
(4.3)
-80
(3.0)

Turkey
-155
(1.7)
India
-52
(1.9)

Italy
-151
(1.6)

France
-44
(1.7)

Greece
-131
(1.4)

Argentina
-42
(1.6)

Portugal
-127
(1.4)

Norway
-41
(1.5)

Hungary
-88
(0.9)

Denmark
-30
(1.1)

Mexico
-74
(0.8)


U.S.
Note : 1) ( ) has the share in the world
Sources : IFS, Bloomberg
14
World’s Current Account Surplus countries are
either oil producing countries or U.S. ‘factories’.
(100 million $, %)
1987
10 countries
2004
1,862
(96.6)
10 countries
6,343
(73.6)

Japan
844
(43.7)

Japan
1,721
(20.0)

Germany
469
(24.3)

Germany
1,034
(12.0)

Taiwan
180
(9.3)

China
687
(8.0)

Korea
101
(5.2)

Swiss
602
(7.0)

Swiss
63
(3.3)

Russia
599
(7.0)

South Africa
51
(2.6)

Saudi Arabia
315
(6.0)

Kuwait
46
(2.4)

Norway
344
(4.0)

Mexico
42
(2.2)

Sweden
285
(3.3)

Netherlands
42
(2.2)

Singapore
279
(3.2)

Malaysia
26
(1.3)

Korea
276
(3.2)
Note : 1) ( )has the share in the world
Data : IFS, Bloomberg
15
U.S. has ‘concentrated’ Trade Deficits with Chin and
East Asia.
(100 mil. $, %)
1989
1997
2004
EU 15 countries
10
( 0.9)
167
( 9.2)
1,045
(16.0)
(Germany)
80
( 7.3)
186
(10.2)
459
( 7.0)
Japan
490
(44.7)
557
(30.5)
752
(11.5)
Asian 7Countries
333
(30.4)
795
(43.5)
2,270
(34.8)
(China)
62
( 5.6)
497
(27.2)
1,620
(24.9)
(Taiwan)
130
(11.9)
122
( 6.7)
129
( 2.0)
(Korea)
63
( 5.7)
-19
(-1.0)
198
( 3.0)
Latin America
92
( 8.4)
64
( 3.5)
841
(12.9)
Middle East OPEC
43
( 3.9)
-2
(-0.1)
221
( 3.4)
128
(11.7)
245
(13.4)
1,387
(21.3)
99
( 9.1)
179
( 9.8)
668
(10.3)
1,096
(100.0)
1,826
(100.0)
6,517
(100.0)
Others
(Canada)
Total
Note : 1) minus (-) indicates the U.S.’s surplus
Data : U.S. Government
China has big surplus with U.S., and deficits with
Japan, Korea, Taiwan and oil producing countries.
16
Updated statistics can be
found in many places, such as


http://www.epi.org/publications/entry/international_pict
ure_20100211
http://www.census.gov/indicator/www/ustrade.html
17
Once again, the major
characteristics of U.S. Dollar
Liquidity
1)
2)
U.S. has long-standing and increasing Trade
Deficits with the world.
U.S. trade deficits with China and East Asia
are growing fastest.
18
Let’s think about some
additional questions:
1. What will be the limit to the U.S. trade deficit? ; How come the US can
increase the trade deficits so much without any constraint?
2. Is there any interconnection between X-M, and S and I? ; What about
the causation in the above relationship? Which causes which?
3. How come this flow of funds and the shifting of production(=income
generation) from the U.S. to East Asia does not decrease the National
Income of the U.S.?
->Is the partnership byy design or by chance?
-> Why would the situation where the U.S. trade deficits are concentrated
with East Asia be better than the ‘hypothetical’ one where the U.S.
trade deficits are evenly distributed across countries in the world?
19
U.S. and East Asia: Mirror Image of Macroeconomics Variables:
Savings, Investment and Trade Deficits
(the mirror image of U.S. )
Blue- Saving
Red – Investment
(not a mirror image of U.S.,
except for Trade Balance)
Orange – Current Account
Observation:
1)In U.S., Current account Deficits(Up), Strong Investment(Up) and UnderSavings(Down): Over Consumption.
2) In East Asia, Current account Surplus(Up), Weak Investment, Over-Savings:
Under-consumption.
20
For above Question3:
What is happening to the component variables in
the following equations?
At equilibrium, C + S + T = C + I + G + X-M.
East Asian Countries’ GNP
C + S + T > C + I + G and thus X – M>0
U.S.’s GNP
C + S + T < C + I + G and thus X – M<0
21
East Asian Countries’ GNP
C + S + T > C + I + G and thus X – M>0
S + T-G > I
National Savings (Private Savings S + Public
Savings T-G) exceeds Investment.
X-M >0 and NX becomes Net Capital Outflows
22
How come can the Trade Deficits
go one forever without having big
negative impacts on U.S.
economy?


In U.S., trade deficits mean U.S. $ leaking to
China, reducing Money Supply and having
deflationary impacts on U.S. economy.
To offset this decreasing money supply, U.S.
might have to print out U.S. $: Then,
U.S. domestic money supply may recover, but
world supply of U.S. dollar rises, having
downward pressure on U.S. $’s external values.
23
U.S. Dollar’s External
Value

The absolute values have fallen substantially, but
the real weighted value against major countries
has not fallen very much.
24
U.S. : Current Accounts and Currency Value FOREX
(1billion
(%
150
400
125
200
100
0
75
50
25
-200
Current Account
External Value of $
0
-400
-600
-800
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
25
3. Flows of Capital



International Liquidity does not stay
invested in the East Asia -Monies are
flowing back to U.S.
This fuels U.S. imports from Asia
This gluts U.S. financial market, pushing
Stock Prices up and Interest Rates down
26
U.S.: Net External Liabilities (Debts)
=Credit from the rest of the World
(as of GDP, %)
30
25
20
15
10
5
0
-5
1980
1984
1988
1992
1996
2000
2004
-10
-15
27
Who are buying U.S. Bonds?
(100 mi. $)
1990~94
1995~99 (A)
Post 2000 (B)
Net (B – A)
2,710
5,890
18,280
9,690
 Asian
Countires
1,200
3,010
9,500
6,490
European
Countries
1,150
4,280
4,880
600
Latin
Americans
210
1,080
1,470
390
Total


Data: U.S. Government Documents
28


The U.S. Dollar has kept up its value pretty
well in light of the worsening Current Account.
Why?
If capital does not flow back from East Asia to
U.S., the U.S. Dollar may have lost more
values.
->Numerical Exposition is given separately.
-> This is related to the concept of “Above the
Line” External Equilibrium.
29
What ultimately affects FX rates and others
in the external sector is not Trade Balance,
but Above-the-Line Balance of Payment.
 Above the line BP
= Trade Balance + Spontaneous Net Capital
Inflows

30
Spontaneous Capital Flows




You may over-consume (more consumption that
income) through imports of foreign goods.
However, as long as the foreign countries give you
“Credit”(lending Money-back-to you), you can
continue the over-consumption.
Behind it lie the confidence of foreign countries
and your self-confidence (in your future income
capability).
Foreigners are ‘investing’ on your future.
31
Current Fundamentals of Global Liquidity Creation
(U.S.)
Investmen
t on High
Tech
(Asia, etc.)
Growth
Government
Budget
Deficits rises
Lack of
Investment
Managed
FOREX
Savings
Glut
Export
Promotion
s
Consumption Rises;
Savings lags
9.11;
Wars
Current
Account
Deficits
Current Account
Imbalance
Current
Account
Surplus
Spontaneous
Capital Flows
External Liability
Position Imbalance
32
Spontaneous Capital Inflows reflect
confidence in U.S. economies



Because China sends U.S. $ back to U.S.,
U.S. does not have to print out money by that
amount.
To that extent, it creates jobs in U.S. in
finance of global investment management.
By the amount of U.S. $ liquidity flow back,
U.S. does not have to print out that much of
money.
33


This kind of ‘Division of Labor’ between U.S.
(managing finance) and China(producing
goods) is based on an implicit design between
the two parties.
It is noticed by sharp reporters, and political
economists.
Without this, U.S. would have i)Deflation
domestically; and ii) Rapidly declining value of
U.S. Dollar externally.
34
Thus we can say that


the current setting of ‘U.S. Dollar
Liquidity’ is serving good purposes for
the U.S. part.
Most of outcries about ‘trade deficits’
and ‘Chinese undervalued FX rates’
may be just rhetoric(al).
35
The ultimate problem may lie in
China’s Conflicted Virtue, not
U.S. Deficits

McKinnon’s Concept of Conflicted Virtue
->China will have the danger of ‘Liquidity Trap’

Erturk’s paper
->China’s liquidity may not be all absorbed in
U.S.’s recessionary economy.
36