Matt Nolan

Currency manipulation: What they don’t tell you

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It appears that one of President Obama’s first concerns is “currency manipulation” by China – very interesting. The administrations view seems to be:

The US has long felt that China has artificially depressed the value of its currency to boost exports – to the detriment of US business – but the Bush administration always stopped short of formally declaring China a currency manipulator.

However, I would also note who in the US it benefits: The US consumer. When China devalues their own dollar, they are making exports more cheaply for the rest of the world – including the US.

I’m all for market pricing the in the face of good information – but lets not forget that US consumers have benefited from this action.

Matt Nolan

Chinese growth slows rapidly

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Given the increasing importance of China as a trading partner to New Zealand (they are our 4th largest trading partner, account for 4.5% of our exports in the year to November *) and as a major support for our main trading partner, Australia, the rapid slowdown in growth in China should be concerning.

Both Calculated Risk and Econbrowser mention that Chinese economic growth has slid to 6.8%pa in December – down from 9.0%pa in September.  According to Nouriel Roubini this indicates that Chinese economic activity was virtually unchanged between the September and December quarters (seasonally adjusted) – indicating a massive loss of momentum in the worlds fastest growing economy.

This slowdown is a lot more rapid than expected – as is illustrated by this graph from Econbrowser:

Matt Nolan

This is why exports from Asia are falling in a hole …

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Calculated Risk illustrates growth in US retail sales over the past 15 odd years:

retaildec2008

Source: Calculated Risk.

Now we know that exports from Japan are plummeting. We suspect exports from China are falling. This decline in spending in the world’s largest economy would be the reason why. Very interesting …

Update: Don’t forget about trade, ick!

Matt Nolan

Why New Zealand’s current account deficit will begin to fall

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Two releases today have made it obvious that the New Zealand current account deficit will decline over the coming quarters.

The first was Japan’s reported current account surplus – it is down 66% on a year ago. With a range of structural factors also likely to drive down Japans CA surplus over time (here) and with other Asian nations following in Japan’s footsteps, we are running out of countries that will fund our debt.

Secondly, S&P has given our currency  rating a negative outlook going forward.

As a result, isn’t it good that New Zealand consumers have been slashing back spending and cutting debt in the face of recent mayhem – rather than being forced to adjust even more sharply further down the line 😛 . A CA of deficit of below 5% of GDP may actually be a possibility by the end of 2009 – who knows 😀 .

However, if this is the case a raft of government borrowing to “stimulate” economic activity would only make things worse – something that is worth keeping in mind over the coming months methinks.

Matt Nolan

Japan’s hole, the US hole, our hole?

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I just took a peak at an interesting Business Week article from March 2006 called “How Japan fell into the Hole“.

The key message for me was this:

This shift to debt minimization, however, completely disrupts the normal workings of the economy. That’s because the corporate sector no longer borrows the funds saved by the household sector, even at ultra-low interest rates. With no one borrowing, those personal savings — plus the debt companies are repaying — pile up unused in the banks, effectively shrinking aggregate demand by the same amount. Left unattended, this deflationary gap will continue to shrink the economy until almost everyone becomes too poor to save any money.

In order for the disruption to become severe, we need reserves to be built up – money will need to be hid under pillows.  In this case, if the government can get hold these resources and put them to use (or say, if people are only willing to lend to government because of a substantially negative economic outlook) we avoid the paradox of thrift.

Fundamentally, for our demand deficiency to really get kicking, we need one of our prices (interest rates) to get “stuck” at a level which is “too high” leading to excess savings.  We are seeing a similar situation in the US, the question is – will we run into the same thing here in little old NZ?