Although the high levels of public and private debt in the US should concern me, and the collapse in asset values should have me shaking in my boots, there is another factor that has me really concerned about the outlook of the US economy: The exchange rate.
Now, the US$ is still weak relative to history, sure, but that isn’t my issue. My concern is the way the US$ moves in the face of new information about the US economy.
Can be found at this excellent post on Economist’s View.
Lehman is down, Merrill Lynch is sold – this is far bigger than the collapse of Bear Stearns (especially since it appears to be absent a straight bailout).
I suppose we will have a clearer indication of what is going on tomorrow. Expect our dollar to suffer on the back of the higher perceived risk in the world economy – the level of volatility today (without any clearly terrible economic information, although manufacturing was quite average 😉 ) indicates that expectations of increased risk are already feeding into investor movements:
Source (NBNZ)
Just remember there are two main risks to NZ from any foreign crisis:
These aren’t independent – if the second factor stays solid, our ability to fund debt (and people’s willingness to lend) will stay fine. So lets just hope our milk and meat stay popular 😛
Over at the Big Picture, Barry Ritholtz has been constantly complaining that the GDP deflator is underestimating inflation. Well I’m not particularly surprised since the GDP deflator does not measure inflation persee.
His specific concern is that the rising oil prices have decreased the GDP deflator – he thinks this is ridiculous, however, if we are willing to stop being conspiracy theorists for a little while we will see that it is fine.
Ok, so the low priced houses that we saw in Detroit were concerning – however, it turns out there is a hell of a lot more of them.
How about $1 houses and 182 properties that are listed below $1000 – holy hell (search result here).
Lets just say that there must be some investors that are being absolutely burned – especially in Detroit!
What is going on in Detroit (other than the continuing collapse in the car industry)? Have they found toxic waste under the city? Is the population leaving? Have rates increased markedly?
Now that Quotable Value is telling us the New Zealand house prices are finally falling (down 2.2% on a year earlier in July), the reality has sunk in that this might be a long adjustment.
However, the downturn in the US housing market has been happening a lot longer, and shows no sign of abating. Especially with some houses now selling for $499US! (ht Stackelberg Follower)
In the Financial Times, Martin Feldstein wrote about the difference between the EU and US monetary setting regimes – specifically he wanted to answer why the EU was lifting rates, while the US had been cutting. (ht Greg Mankiw).
Ultimately, he puts this difference down to a number of factors: