Transcript Balance of Payments - Villanova University

Bob LeClair's Finance and Markets Newsletter
For the Week Ending:
Change
1/1/15
2/7/15
2/14/15
(Week)
Dow Jones Ind. Avg.
17,823
17,824
18,019
195
(% Change)
1.09%
S & P 500 Index
2,059
2,055
2,097
42
(% Change)
2.02%
NASDAQ Composite
4,736
4,744
4,894
149
(% Change)
3.15%
Change
(Yr-to-Date)
196
1.10%
38
1.85%
158
3.33%
S & P 500 P/E Ratio
S & P 500 Div. Yield
T-bill - S&P 500 Yield
19.7
1.92%
-1.88%
20.0
1.98%
-1.96%
20.4
1.96%
-1.95%
0.4
-0.02%
0.01%
0.8
0.04%
-0.07%
30-Year T-Bond Yield
10-Year T-Bond Yield
91-Day T-Bill Yield
Yield Spread
2.75%
2.17%
0.04%
2.71%
2.53%
1.96%
0.02%
2.51%
2.65%
2.05%
0.01%
2.64%
0.12%
0.09%
-0.01%
0.13%
-0.10%
-0.12%
-0.03%
-0.07%
30-Year Mortgage
15-Year Mortgage
1-Year Adjustable Rate
30-Yr. - 1-Yr. ARM Rate
3.87%
3.15%
2.40%
1.47%
3.59%
2.92%
2.39%
1.20%
3.69%
2.99%
2.42%
1.27%
0.10%
0.07%
0.03%
0.07%
-0.18%
-0.16%
0.02%
-0.20%
$ Value of Euro (€)
Japanese Yen (¥/$)
Crude Oil, Spot Price
Gasoline, Reg. ($/Gal.)
$1.2104
119.78
$54.12
$2.26
$1.1316
119.12
$51.69
$2.17
$1.1394
118.75
$52.78
$2.25
$0.0078
-0.37
$1.09
$0.08
-$0.0710
-1.03
-$1.34
-$0.01
Top 5 Countries with
which the U. S. Trades, 2014
Country
Total Trade
($ Billions)
Top 5 Countries with
which the U. S. Trades, 2014
Country
Total Trade
($ Billions)
Canada
658.1
China
590.7
Mexico
534.5
Japan
200.9
Germany
172.6
Top 5 Countries with which the
U. S. has a trade deficit, 2014
Country
Trade Deficit
($ Billions)
Top 5 Countries with which the
U. S. has a trade deficit, 2014
Country
Trade Deficit
($ Billions)
China
-342.6
Germany
-73.7
Japan
-67.0
Mexico
-53.8
Canada
-34.0
Top 5 Countries with which the
U. S. has a trade surplus, 2014
Country
Trade Surplus
($ Billions)
Top 5 Countries with which the
U. S. has a trade surplus, 2014
Country
Trade Surplus
($ Billions)
Hong Kong
+35.1
Netherlands
+22.9
U.A.E.
+19.3
Australia
+16.0
Singapore
+14.1
Chapter 5:
The Balance of Payments
and International
Economic Linkages
Balance of Payments
???
Balance of Payments
Net value of all economic
transactions - including trade in
goods and services, transfer
payments, loans, and
investments - between residents
of the same country and those
of all other countries.
BoP and GDP
GDP  C  I  G  ( X  M )
where :
C  consumption spending
I  capital investment spending
G  governmentspending
X  exports of goodsand services
M  imports of goodsand services
(X - M)  balance on current account
BoP and GDP – 4Q/2014
Source: Bureau of Economic Analysis
[www.bea.gov]
GDP  C  I  G  ( X  M )
17,711 12,112 2,960 3,187 (2,341 2,890)
17,711 12,112 2,960 3,187 549
BoP and GDP – 4Q/2014
[GDP = C + I + G + (X – M)]
100%
68%
17%
18%
-3%
U. S. Balance of Trade [Goods]
(1954 – 2014; $Billions)
Balance of Payments Accounts
Current
Account
Financial Account
Capital Account
Errors and Omissions
Reserves and Related Items
Balance of Payments Accounts
Current
Account: (millions)
Goods - 2014: - $782,100
Services - 2014: + $233,600
Net Amount
- $548,500
Balance of Payments Accounts
Financial
Account
– Direct foreign investment
– Portfolio investment
– Other capital investment – shortterm financial transactions
Balance of Payments Accounts
Capital
Account:
– Debt forgiveness
– Assets transferred by people who
move from one country to another
– Sale of patents and trademarks
Balance of Payments Accounts
Double
Entry System:
debits offset credits
sum of transactions equals zero
unaccounted for differences are
recorded as statistical discrepancy
Balance of Payments Accounts
Debit
Entries:
purchase of foreign goods,
services, or assets
decline in foreign liabilities
Balance of Payments Accounts
Credit
Entries:
sale of domestic goods, services,
or assets
increase in foreign liabilities
Balance of Payments Accounts
Current
Account
Financial Account
Capital Account
Errors and Omissions
Reserves and Related Items
∑ = 0
Balance of Payments Accounts
Current
Account (+/-)
Financial Account (-/+)
Capital Account
Errors and Omissions
Reserves and Related Items
∑ = 0
International Account Relationships
Current 
Account   P rivate - P rivate  - Govt. 
Savings Investment Deficit








Balance 
Saving as a % of Disposable
Household Income, OECD, 2012
U. S. Balance on Goods, Services,
and Income 1981-2007 ($, Billions)
U. S. Balance of Trade, 1954-2014
[Goods & Services; $billions]
Bob LeClair's Finance and Markets Newsletter
For the Week Ending:
Change
1/1/15
2/14/15
2/21/15
(Week)
Dow Jones Ind. Avg.
17,823
18,019
18,140
121
(% Change)
0.67%
S & P 500 Index
2,059
2,097
2,109
12
(% Change)
0.58%
NASDAQ Composite
4,736
4,894
4,953
59
(% Change)
1.20%
Change
(Yr-to-Date)
317
1.78%
50
2.44%
217
4.57%
S & P 500 P/E Ratio
S & P 500 Div. Yield
T-bill - S&P 500 Yield
19.7
1.92%
-1.88%
20.4
1.96%
-1.95%
20.5
1.96%
-1.94%
0.1
0.00%
0.01%
0.9
0.04%
-0.06%
30-Year T-Bond Yield
10-Year T-Bond Yield
91-Day T-Bill Yield
Yield Spread
2.75%
2.17%
0.04%
2.71%
2.65%
2.05%
0.01%
2.64%
2.72%
2.12%
0.02%
2.70%
0.07%
0.07%
0.01%
0.06%
-0.03%
-0.05%
-0.02%
-0.01%
30-Year Mortgage
15-Year Mortgage
1-Year Adjustable Rate
30-Yr. - 1-Yr. ARM Rate
3.87%
3.15%
2.40%
1.47%
3.69%
2.99%
2.42%
1.27%
3.76%
3.05%
2.45%
1.31%
0.07%
0.06%
0.03%
0.04%
-0.11%
-0.10%
0.05%
-0.16%
$ Value of Euro (€)
Japanese Yen (¥/$)
Crude Oil, Spot Price
Gasoline, Reg. ($/Gal.)
$1.2104
119.78
$54.12
$2.26
$1.1394
118.75
$52.78
$2.25
$1.1378
119.08
$51.16
$2.28
-$0.0016
0.33
-$1.62
$0.03
-$0.0726
-0.70
-$2.96
$0.02
How to cope with the trade deficit?
Currency
depreciation
Protectionism
End foreign ownership of U. S.
assets
Increase the savings rate
Should We Devalue the $?
Overvalued
currency
– tax on exports; subsidy to imports
Weaker currency should reduce
deficits
Contrary to U. S. experience
“J-curve” theory
The Theoretical J-Curve
Net change in trade balance
8
Trade balance
eventually
improves
6
4
2
Currency depreciation
0
-2
-4
-6
Trade balance
initially deteriorates
Tim e
Protectionism:
Tariffs, Quotas, etc.
Each
raises domestic prices
and erodes purchasing power
Lower standard of living
Tend to reduce both imports
and exports - deficit remains
unchanged
“Clinton Imposes Tariffs on Steel
Imports That Exceed Quota”
[New York Times, 2-12-00]
“President
Clinton imposed tariffs
on steel imports valued at $410
million today, answering pleas
from steel makers and labor unions
but raising tensions with South
Korea, Brazil, Germany, Japan and
other major trading partners.”
“Clinton Imposes Tariffs on Steel
Imports That Exceed Quota”
[New York Times, 2-12-00]
“The
duties, which take effect
immediately, will sharply raise the
price of steel imports that exceed a
quota pegged at 1998 import
levels. The United States says it
was flooded with steel imports in
1998 and 1999.”
“Clinton Imposes Tariffs on Steel
Imports That Exceed Quota”
[New York Times, 2-12-00]
“The
action places a 10 percent
duty on wire rod and a 19 percent
surcharge on line pipe, with the
duties phased out over three years.
The duties will hit only those
imports that exceed the 1998
baseline.”
“WTO panel rules that U. S.
steel duties are illegal”
[MSNBC, 7-11-03]
“In
a stinging rebuke to the United
States, the World Trade Organization ruled Friday that heavy
duties on steel imports imposed by
the Bush administration violate
global trade rules.”
“WTO panel rules that U. S.
steel duties are illegal”
[MSNBC, 7-11-03]
“A
three-member panel of trade
experts said in a 968-page ruling
that the “safeguard” duties of up to
30 percent … were out of line with
WTO rules.”
“WTO panel rules that U. S.
steel duties are illegal”
[MSNBC, 7-11-03]
“Washington
immediately said it
would appeal, and would keep in
place the tariffs that President Bush
had justified as necessary to protect
domestic steel producers against a
flood of cheap imports during a
restructuring period.”
“WTO panel rules that U. S.
steel duties are illegal”
[MSNBC, 7-11-03]
“In
response, the European Union
stepped up plans to impose $2.2
billion in retaliatory duties on U. S.
imports, ranging from footwear to
fruit and vegetables – possibly
pricing them out of the market.”
“Bush Administration to Impose Tariff
on Softwood Lumber from Canada”
[Wall Street Journal, 8/10/01]
“The
Bush administration announced
Friday that it would impose a 19.3%
penalty tariff on softwood lumber
imported from Canada in retaliation for
what the U. S. said were unfair
government subsidies given to the
Canadian lumber industry.”
“Bush Administration to Impose Tariff
on Softwood Lumber from Canada”
[Wall Street Journal, 8/10/01]
“An
economist for the National
Association of Home Builders said the
higher tariffs could add up to $1,000 to
the cost of a new home.”
Cross-Border M&A Moves
Fan Protectionism in EU
- The Wall Street Journal, 2/27/06
“French
Prime Minister
Dominique de Villepin’s
government has arranged for the
merger of Suez and Gaz de France
in a $37.98 billion deal, in an effort
to fend off a hostile bid for Suez by
Italy’s Enel.”
Cross-Border M&A Moves
Fan Protectionism in EU
- The Wall Street Journal, 2/27/06
“The
efforts to fight off foreign
buyers of publicly traded
companies come amid a wave of
cross-border takeovers in Europe
and underscore how nationalism
continues to thwart the integration
of the Continent’s economy.”
Cross-Border M&A Moves
Fan Protectionism in EU
- The Wall Street Journal, 2/27/06
“The
moves will test Europe’s
commitment to enforcing a free
flow of capital and whether
Brussels has the means to face
down protectionism in two of the
European Union’s most powerful
capitals, the Journal writes.”
Cross-Border M&A Moves
Fan Protectionism in EU
- The Wall Street Journal, 2/27/06
“This
is the first opportunity the
prime minister has to demonstrate
he can do something concrete
about his doctrine of economic
patriotism ...”
“France backs G. E.’s bid for
Alstom, with a new twistl”
[International New York Times, 6-21-14]
 “President
Francois Hollande’s government said it backed the G. E. bid and, in a
surprise move, would itself take a 20
percent stake in the main remaining portion
of Alstom. The agreement, if concluded,
would end nearly two months of
negotiations by G. E. and the government.”
“France backs G. E.’s bid for
Alstom, with a new twistl”
[International New York Times, 6-21-14]
 “A
previous deal that Alstom and the
American conglomerate had tentatively
reached … was stopped in its tracks in May
by opposition from the Hollande government, which described Alstom as too much
of a national treasure to let fall into foreign
hands and demanded a seat at the
negotiating table.”
End/Restrict Foreign
Ownership of U. S. Assets
Increase
domestic interest rates
Result: more domestic savings
Result: domestic investment will
fall
Result: slower economic growth
Stimulate Domestic Saving
Provide
tax incentives for
saving:
– Traditional IRA Accounts
– Roth IRA Accounts
– 401(k) & 403(b)(7) plans
– Section 529 plans
“U.S. Trade Deficit Widens, ...”
[New York Times, 9/21/95]
“In
the long run, according to
textbook economics, the huge
American trade gap is an inevitable
result of the nation’s saving too
little [in order] to finance a high
level of consumption.”
“U.S. Trade Deficit Widens, ...”
[New York Times, 9/21/95]
“Foreigners
essentially lend to the
United States the difference,
obtaining the wherewithal by
selling more goods and services
here than they buy.”