[Nicko]

So I'm doing research for a project and I'm looking at some stats from the new World Bank Development Report 2006...

On paper, Canada is well in the plus, we export more than we import and have healthy cash reserves. China doesn't look that bad with their numbers, although I guess it doesn't account for how they have drastically undervalued their currency.
I threw in a few random countries just to see the differences (yes Kenya has issues). Oil rich Norway is swimming in cash, no wonder they were voted the best country in the world.

Check out the UK... then the US! I can understand why the world worries about them (moreso the US). They export about half as much as they import and their current account balance (in the negative) is more than most countries combined. Whats going to happen to that number in a few years? And what will be the implications for the rest of the world?
(I've also been doing quite a bit of research on the 'real estate bubble' in the US -- and the fact that the $ may lose upwards of 30%)

I still don't like statistics, but they become slightly more interesting if you look at them long enough.

[NYCFarmboy]

yup, the US & UK can afford to buy more than others.

[Nicko]

But aren't they only able to do that as long as other countries are willing to invest in them? In the long run, doesn't that make you more vulnerable?

[BRussell]

Wow, Germany exports more than the US? I assume that includes exports to other countries in the EU?

I've always thought the trade imbalance is a funny number. There's no rule that says your imports and exports have to be in balance, and there aren't any direct negative consequences (like there is for our budget deficit). It just means there's a lot of money in the US, and we like to buy stuff. Is it really better to be an exporter country? Many of those countries are poor countries where people work in sweat shops and have no money for themselves to raise their standard of living, but sell tons of stuff to others. We'd certainly be better off if we had a higher savings rate, but the fact that we've got money to burn on imported goods is hardly a bad thing.

[subego]

Originally Posted by Nicko

I can understand why the world worries about them (moreso the US)

Because we buy what they have to sell?

Ingrates.

[BlackGriffen]

It's kind of funny that exporting more than you import is considered a good thing whilst the converse is a bad thing. Because, if you do the former doesn't that mean that somebody is getting screwed because they have to do the latter? It seems to me like it's best to keep that sort of stuff as near to balanced as possible, on the average. Going too far in either direction, imports or exports, distorts your economy and sets you up for a screw over in the long run.

It just seems kind of funny for the rest of the world to be concerned about the screwing over that they have an equal part in, you know? I just get an image of a drug pusher or a loan shark showing concern because he realizes that his biggest client is self-destruct on his own product.

Not that I blame the rest of the world for it. After all, the U.S. government had at least an equal say in the trade negotiations that got us here and the whole racket is being run by multinational corporations - most of them owned and run by American management, it seems.

BlackGriffen

[Nicko]

Thats true, oil producing nations have been making a killing. Similarly, some African countries are having their normally stagnant economies boosted by high prices in things like copper and the like.

All the US has to do is keep printing more money and everyone's happy

[paul w]

I would love to see a reasonable debate over this trade deficit concept. I'm on the fence on this issue, but I've always operated under the simplistic notion that one of the reasons is the US economy was simply the best place for others to sell their goods.

More demand- wealthy enough and have fewer taxes and tariffs than our European countries.

[Nicko]

Originally Posted by paul w

I would love to see a reasonable debate over this trade deficit concept. I'm on the fence on this issue, but I've always operated under the simplistic notion that one of the reasons is the US economy was simply the best place for others to sell their goods.

More demand- wealthy enough and have fewer taxes and tariffs than our European countries.

I really don't know much about economics. But I do know that if you travel to any developing country people practically kiss your feet if you pay them in USD. In Cambodia for example, most everyone uses USD instead of their own currency as theirs isn't worth the paper its printed on. Ofcourse thats usually a good way to get ripped off

It just seems that the trade deficit for the US in particular is *so* absolutely gigantic, how will this not one day (perhaps in the near future) cause a major problem for the entire world?

[BRussell]

Could you be specific about how it could cause a problem, and what type of problem it will cause? Of course it's a bad thing if we send American jobs to other countries for them just to turn around and sell it back to us. But we don't seem to have an employment problem right now - our unemployment rate is lower than most other countries.

I assume that's because companies in the US mostly make stuff for Americans to buy. For example, Germany is a huge exporter, but they export the majority of that within the EU itself. When US states "export" to other states within the US, that doesn't count as an export. And yet most companies within the US stay within the US market, because it's the biggest market. So Americans have jobs making sh!t for other Americans to buy, and to a lesser extent for people from other countries to buy. But Americans have so much money to buy so much sh!t, that Americans themselves can't make enough sh!t, so other countries chip in too.

[Zeeb]

Originally Posted by Nicko

I really don't know much about economics. But I do know that if you travel to any developing country people practically kiss your feet if you pay them in USD. In Cambodia for example, most everyone uses USD instead of their own currency as theirs isn't worth the paper its printed on. Ofcourse thats usually a good way to get ripped off

It just seems that the trade deficit for the US in particular is *so* absolutely gigantic, how will this not one day (perhaps in the near future) cause a major problem for the entire world?

The only negative I heard that was related to the trade deficit has to do with manufacturing capacity. Since more goods in the U.S. are made elsewhere, we are losing the ability to make things like razors, tv's, computers etc ourselves.

[Nicko]

Originally Posted by BRussell

Could you be specific about how it could cause a problem, and what type of problem it will cause? Of course it's a bad thing if we send American jobs to other countries for them just to turn around and sell it back to us. But we don't seem to have an employment problem right now - our unemployment rate is lower than most other countries.

I assume that's because companies in the US mostly make stuff for Americans to buy. For example, Germany is a huge exporter, but they export the majority of that within the EU itself. When US states "export" to other states within the US, that doesn't count as an export. And yet most companies within the US stay within the US market, because it's the biggest market. So Americans have jobs making sh!t for other Americans to buy, and to a lesser extent for people from other countries to buy. But Americans have so much money to buy so much sh!t, that Americans themselves can't make enough sh!t, so other countries chip in too.

You make some excellent points. Clearly the raw numbers don’t tell the whole story.
So let’s assume that the process of globalization continues. Will there be a ‘redistribution’ of trade over time? And what are the consequences? The pessimist in me sees a few wars that could result from such a traumatic shift.

[itai195]

If you throw in Australia, you'll see they're in even worse shape than the UK and US. IIRC same with Japan.

The problem with the trade deficit, as I understand it, is primarily in the imbalances it creates. When the deficit gets this massive, it creates an unstable situation that could cause all sorts of problems for the global economy. The increasing deficit the last few years has been financed with cheap debt, but at some point consumers will no longer be able to take on more debt and the foreign central banks financing our debt will stop doing so.

That said I'm not an economist. It's a complex situation with many variables involved, most of which I don't really understand.

[finboy]

Originally Posted by BRussell

Could you be specific about how it could cause a problem, and what type of problem it will cause?

I'm not sure I understand either. I'd like to hear how it will cause a problem so I can plan ahead.

I agree with the point about the loss of manufacturing capacity in the US itself, but I also think most of us would rather NOT work in a textile mill. Been there, done that, got the overalls.

AND itai195, don't feel bad. I AM an economist and I don't understand it (or, I don't see a problem).

[BlackGriffen]

Originally Posted by BRussell

Could you be specific about how it could cause a problem, and what type of problem it will cause? Of course it's a bad thing if we send American jobs to other countries for them just to turn around and sell it back to us. But we don't seem to have an employment problem right now - our unemployment rate is lower than most other countries.

I assume that's because companies in the US mostly make stuff for Americans to buy. For example, Germany is a huge exporter, but they export the majority of that within the EU itself. When US states "export" to other states within the US, that doesn't count as an export. And yet most companies within the US stay within the US market, because it's the biggest market. So Americans have jobs making sh!t for other Americans to buy, and to a lesser extent for people from other countries to buy. But Americans have so much money to buy so much sh!t, that Americans themselves can't make enough sh!t, so other countries chip in too.

Wish that were true, BR. Look at the employment rate - it's actually pretty low. The reason unemployment is so low is because the job market is still really crappy, it's just stayed in bottomed out territory for so long that a lot of people are no longer counted in the unemployment figure. If you look at the total number of new jobs created since 2000 it hasn't even kept up with population growth.

It's also worth considering the types of jobs being created. For the past two years there have been two sectors driving the economy - healthcare and housing. With the rising interest rates, housing is tanking. Healthcare seems all right. Everything else has been jobs at places like McDonald's and WalMart. An economy like that can't sustain itself. It simply won't last forever.

I know the whole idea of globalization is that no single economy has to sustain itself, but the loans used to finance this situation are eventually going to come due, and that's going to hurt both our economy and the economies that have specialized themselves around exporting crap to us.

BlackGriffen

[Nicko]

Originally Posted by itai195

If you throw in Australia, you'll see they're in even worse shape than the UK and US. IIRC same with Japan.

The problem with the trade deficit, as I understand it, is primarily in the imbalances it creates. When the deficit gets this massive, it creates an unstable situation that could cause all sorts of problems for the global economy. The increasing deficit the last few years has been financed with cheap debt, but at some point consumers will no longer be able to take on more debt and the foreign central banks financing our debt will stop doing so.

That said I'm not an economist. It's a complex situation with many variables involved, most of which I don't really understand.

Speaking of housing, been reading: The Housing Bubble Blog

Now, either the site is just a gathering place for whacko alarmists, or they are on to something...I haven't quite decided which it is yet, but the data doesn't seem add up, somethings gotta give eventually.

[Sky Captain]

I've been saying that housing has been outrageous for years. Artifically inflated.
But I still bought 68 acers of land.
Paid it off with the check from my burned Cessna.

[Spliffdaddy]

The housing market is a really simple thing to understand.

Housing prices cannot outpace wages - for very long. Sure, the lenders can create loans that allow people to buy a more expensive house than they could otherwise afford. But interest rates are the dominant factor in housing.

This is true to the extent that people buy homes for a place to live. What you see in some markets is people buying houses as an investment. As with most investments, there is the potential to lose money. And if you borrowed the money to 'invest' in a house, you stand a much greater risk of losing money. Your 'investment house' will have to increase in value *more* than the interest rate of the borrowed money. Historically, that almost never happens.

[Peder Rice]

Of course, we aren't likely to see as disastrous a housing collapse as, say, in Japan, because not only is our country growing with respect to population, it is growing in terms of wealth. New homes are built for the upper-middle class while first-home buyers step up and purchase the old homes of the upper-middle class. Because our population is growing, this is sustainable.

Now, of course, I'm terribly oversimplifying things, and, of course, should this delicate balance be disrupted, there could be millions defaulting on loans which could be the disaster that some are anticipating. However, we can always open our borders to more immigrants, we can always lower federal taxes for a quick boost in the GDP, and we can relax environmental standards and minimum wage laws to reintroduce manufacturing and low-income jobs to the marketplace.

We're swimming in options, and we still have a HUGE middle class population. So back to the original topic, this trade imbalance seems to me hardly any bit a problem with regard to debt.

But then, I'm not an economist. Surely, though, there must be at least one real economist on NN, right?

[itai195]

Originally Posted by Spliffdaddy

Historically, that almost never happens.

That depends on the location. Over the last 30 years it's happened in the Bay Area. That said, you're correct about what you say regarding investment performance, but you should take into account the tax deductibility of mortgage interest. Given today's low rates, this is also a reason why prepaying a mortgage isn't necessarily a great idea. Theoretically, your money could yield more over 30 years in the stock market.

[Spliffdaddy]

Oh yes, the myth of tax deductible interest. This one is simple mathematics. If people would simply do the math, they'd discover that it's really dumb.

You borrow $100,000. Your interest payments for the year add up to $6,000. The federal government lets you *not* pay taxes on that $6,000 - which saves you about $900.

I'm sorry, but paying $6,000 in interest in order to save $900 on your taxes is not a reason to buy a house.

[itai195]

Originally Posted by Spliffdaddy

I'm sorry, but paying $6,000 in interest in order to save $900 on your taxes is not a reason to buy a house.

Not what I said. For the purpose of figuring investment performance you should compare the gain in your home's value to the interest rate you paid after the tax deduction. If you're borrowing at 6% and have a 25% marginal rate, you are really borrowing at 4.5%. To be nit-picky, one also should take property taxes and maintenance costs into account.

[NYCFarmboy]

Originally Posted by Nicko

But aren't they only able to do that as long as other countries are willing to invest in them? In the long run, doesn't that make you more vulnerable?

as long as other countries need the money they will continue to sell us stuff.



vulnerablity would be being at the whim of the US & UK who has the money to buy

[finboy]

I read in USA Today this morning that what we should REALLY pay attention to is that "when housing prices fall some rents are increasing." or some weasel language like that.

How does a collapse in housing lead to RISING rents? I'm not sure how that works.

Shows what types of idiots get to write in newspapers. I'll bet nobody will call the columnist out on it either.

[DBursey]

The value of US external liabilities (ie: foreign debt) rises as a consequence of the large and growing trade & current accounts deficit.

If Americans do not work to reduce the trade deficit, foreigners eventually will be less willing to hold dollar denominated assets, thus undermining the US dollar. The United States treasury will be compelled in turn to increase interest rates in order to attract continued foreign investments. Higher interest rates will push the economy towards recession.

In other words, the current account / trade deficit is less an indication of wealth and more a growing spiral of indebtedness.

[itai195]

Originally Posted by finboy

I read in USA Today this morning that what we should REALLY pay attention to is that "when housing prices fall some rents are increasing." or some weasel language like that.

How does a collapse in housing lead to RISING rents? I'm not sure how that works.

I haven't read the article, but were they trying to show a causal relationship? If so I'm with you. Anecdotally, rents have been rising wildly in my area this year, but I don't know if it has anything to do with housing prices.

[NYCFarmboy]

Originally Posted by DBursey

The value of US external liabilities (ie: foreign debt) rises as a consequence of the large and growing trade & current accounts deficit.

If Americans do not work to reduce the trade deficit, foreigners eventually will be less willing to hold dollar denominated assets, thus undermining the US dollar. The United States treasury will be compelled in turn to increase interest rates in order to attract continued foreign investments. Higher interest rates will push the economy towards recession.

In other words, the current account / trade deficit is less an indication of wealth and more a growing spiral of indebtedness.

I'm glad the US & UK are not busy weaving baskets for some second/third world country.

[DBursey]

Originally Posted by NYCFarmboy

I'm glad the US & UK are not busy weaving baskets for some second/third world country.

Absolutely. You'll need all you can make for yourselves.