The Triple Deficit from an Asian Perspective

You don't have to be a Hyman Minsky or a Wynne Godley to realise that the US 'triple deficit' is a pretty big structural problem with no obvious solution in sight. By triple deficit I mean: the Federal Government one, the Trade Deficit, and the growing private indebtedness (as % of GDP). This could have a solution if there was some 'winning sector' the US could exploit to pay down the debt as we move upstream. But this is where the 'services leak' the US economy has just sprung must come as such bad news, and now there is only the retirement of the baby boomers to look forward to. You don't have to be Minsky or Godley to do the sums here: it seems some market participants have been playing with their own used envelopes too. Of course, this isn't for tomorrow. But things are happening much faster than I imagined. (Remember the accelaration principle).

Economists fear that Asian investors, who are the largest foreign owners of US Treasuries, may cut their holdings of US government debt, withdrawing a key source of financing for America's large current account deficit. The worries have been fuelled by recent sharp falls in the price of US government debt. Weakness in the US Treasury market could make Asian investors "less willing" buyers of debt securities, said Marcel Kasumovich, head of G10 foreign exchange strategy at Merrill Lynch. He said there had already been a "noticeable shift" downwards in the amount of debt issued by mortgage financiers Freddie Mac and Fannie Mae being bought by foreign investors. Asian investors have piled into the US Treasury markets in recent years, helping to push Treasury prices high and interest rates low. China, Japan, South Korea and Hong Kong owned a combined total of about $696bn in Treasuries at the end of June, up from $512bn in December 2001, according to data from the US Treasury. Asian countries use the income they receive from exporting goods to the US to buy American assets, which helps keep their currencies weak compared with the dollar. This helps keep the price of Asian goods down in the US.

But in recent months, as investors have become more optimistic about an economic recovery, they have begun to sell Treasury debt, sending government bond prices down. Political pressure on Asian governments to alter their exchange rates could also prompt selling. The US Treasury would like Beijing to abandon its fixed currency regime because it is concerned that China is keeping its currency low to support exports. However, if China and other Asian countries were to allow their currencies to strengthen against the US dollar, they would have less need to own US assets. "It could mean Asia pulls out of US markets," said Ethan Harris, chief US economist at Lehman Brothers. If Asian countries were to reduce their holdings of American assets heavily, they would remove a key source of finance for US investment spending.
Source: Financial Times
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Could the UK Overtake Germany?

Essentially silly article in the British Daily Telegraph (what else would you expect from the DT?). But it is silly in an interesting way, since it is based on an interview with Nigel Griffiths, Tony Blair's Trade and Industry Minister. In the interview Griffiths speculates about whether the UK might overtake Germany during the next decade and become the world's number three economy. Whether this is in any way realistic is impossible to say (only time will tell), but what is interesting is the idea that a UK outside the euro might outperform a Germany that is inside, and this from a member of a government committed to joining!

Nigel Griffiths, the trade and industry minister, appears to be forecasting that Germany will experience a decade-long slump, based on his prediction that the UK economy may be bigger than its Western European rival by 2013. "I think that construction and manufacturing alone as sectors could ensure that within 10 years we overtake the German economy," Griffiths told The Telegraph. "We've got to see whether we cannot become the third biggest economy in the world in terms of gross domestic product. I think that is feasible."

The UK is currently the world's fourth biggest economy behind the US, Japan and Germany. However, Germany's economy is currently 30 per cent larger than the UK's. If the UK continues to grow to trend - at 2.5 per cent, according to the Treasury - it would eclipse Germany's economy only if growth in Germany stagnated for an entire decade. Maurice Fitzpatrick, head of economics at Numerica, the City consultancy said: "No European country has seen zero economic for an entire decade for the last 100 years. Only Japan in the past 10 years has a track record this bad."

But Griffiths added that he was lobbying to make overtaking the Germans official Government policy. "It is an aspiration which I am pressing to be part of our Governmental drive." He said he doubted it would become a manifesto pledge in "these specific terms", but that boosting competitiveness would be. The implication of Griffith's remarks may embarrass the Government, which is committed to adopting the euro when economic conditions are right. Selling that to voters would be difficult if the UK's prospects outside the single currency are so much better than Germany's. The UK's GDP is growing by 1.8 per cent, while the latest figures for Germany show a decline of 0.2 per cent. Industrial production in Germany fell by 2.1 per cent in June while in the UK it grew by 2.2 per cent.
Source: Daily Telegraph
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Only Japan has performed this badly. Sounds ominous.

The Weak US Labour Market and Services

Reasonable piece in the NYT about the latest US employment news. Interesting to note that the principal culprit is imagined to be job-loss to China. I would say that the big news here is the services job loss - 67,000. This work is clearly not moving to China, India forms a big part of the picture (although it is important to remember there are many other available services outsourcing candidates), but this doesn't connect with another of the 'flavour of the month' arguments, that the Chinese yuan is too weak. The Indian rupee is floating and has been rising slowly recently (from 49 to 45 to the US dollar), all of which tends to suggest that those of us who are arguing that with such large wage differentials small currency adjustments won't be any big deal, and in China's case may only serve to make internal deflationary tendencies worse, are doing so with justification. The services news is much more preoccupying for the US outlook, since the manufacturing jobs are inevitably vulnerable, the recent decline in manufacturing being only the latest chapter in a long run process. But services, this is different. One way or another, even the US has to pay it's way in the world. This means the US has to find new activities that can justify the enormous per-capita income differential she enjoys. Short of that we could be confronted with another example of the old adage: 'what goes up must come down'. Incidentally, it will be interesting to see what is said about transparency in government procurement in Cancun in the light of some recent and highly publicised services outsourcing restrictions inside the US govt sector. One more time: isn't sauce for the goose also sauce for the gander?

What surprises many economists is that the job-shedding has continued despite what they describe as an extraordinary level of economic stimulus. Low interest rates, tax cuts and rebates, a rise in military spending, mortgage refinancings, growing corporate profits, even a long-awaited improvement in business spending on new equipment and software have all contributed to the rise in the economic growth rate. But jobs are disappearing, and employers continue to resist adding hours for their existing workers. Economists warn that without payroll expansion and rising income from wages, sustaining the economic growth will be difficult once the stimulus weakens. "If we go into next year without job growth, then the consumer's willingness to keep spending comes into question, and recovery is in danger of unwinding," said James W. Paulsen, chief investment strategist for Wells Capital Management. Seeking an explanation for the job drought, some economists call attention to the shifting of production overseas, particularly to China, and to the American economy's rapid gains in productivity. The productivity gains allow companies to maintain the same level of production with fewer workers.

The Labor Department's Bureau of Labor Statistics determines the unemployment rate through a monthly survey of 60,000 households. If respondents say they were unemployed in the week before the survey, they are asked if they are actively looking for work. Only those actively searching for a job are counted as unemployed. Those who say they would like a job but are too discouraged by the difficulties of finding one to search actively are no longer counted as either employed or unemployed. The number of discouraged workers rose by 33,000 last month, subtracting them from the jobless rolls. The count of discouraged workers has more than doubled in the last three years, to 503,000 in August from 203,000 in August 2000. In addition, the number of workers in the survey who described themselves as self-employed grew by 233,000 last month — evidence to some economists that many had lost jobs and were masking their unemployment. "Whenever you see a spike in self-employment in this kind of economy, you know that is involuntary entrepreneurship," said Jared Bernstein, a senior labor economist at the Economic Policy Institute.

The principal employment number comes from a separate survey, covering 160,000 businesses and government agencies and 400,000 work sites. From that survey, the bureau determines the actual number of jobs. Though the biggest loss in August was 44,000 jobs in manufacturing, employment also shrank in computer design and information technology and in government employment. The government job losses were mostly at the state and local level, reflecting widespread cutbacks to balance budgets. The average hourly wage of production workers, about 80 percent of the 129.8 million people employed in August, rose 2 cents in August, to $15.45. In the last 12 months, this wage has risen 2.9 percent, keeping workers ahead of inflation.
Source: New York Times
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Looking Ahead to Cancun

This week our eyes will never be to far away from Cancun, and the forthcoming WTO ministerial conference which begins on Wednesday and which will try to advance negotiations in the so-called 'Doha Round'. The Washington Times today carries an interview with Supachai Panitchpakdi, economist and former deputy prime minister of Thailand. In my book there are two key areas to keep a careful eye on: agriculture and services:

Q: Many poor, developing countries are saying [that] for them to make any movement in areas of interest to rich countries, they want to see substantial movement in Cancun on agriculture — otherwise forget about movement in the other areas of interest to rich countries, and specifically, the new issues such as trade and investment, trade facilitation, transparency in government procurement, and [trade] and competition policy. Do you think that message has gotten through to key capitals like Brussels, Washington and Tokyo?

A: Having had some conversations in the last few weeks and last few days with people around the world, I have the feeling that key capitals of developed countries are mindful of the primacy of agricultural reform, the sign of which is the joint paper that has been produced by the [European Union] and [United States].

Of course, it's not something accepted at the moment. But it's something that we worked on for years in the Uruguay Round [1986-1994] before there could be an agreement between the U.S. and the EU on agriculture. Now we have that, and although I don't think it's the end of our discussion, at least it sends out the kind of signals — they reflect in their joint paper the need for agriculture to be treated upfront. And now that the group of developing countries — they call themselves the Group of 20, and that includes China, Brazil, India and South Africa — I think they are proposing something in response to that paper. ...

It shows that at least here, we have back-and-forth negotiations. People try to recategorize positions, moving their positions. This augurs well for Cancun. We're not there yet, but at least we have identified at least four or five areas of differences, from which we can start our negotiations successfully, fruitfully, in Cancun.
Source: Washington Post
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