Just how unbalanced is trade between the US and China?
Back in 1985, bilateral US-Chinese trade was in balance. The US exported to China about as much as China exported to the US. Since then, however, the US has sucked up Chinese imports. Last year, the US imported almost $290 billion of goods, but exported just $55 billion.
Last year, the US ran up a $818 billion trade deficit. Around a third of that deficit was due to trade with China. Overall, the bilateral US-China trade deficit is running at about 2 percent of GDP a year.
So how do the Chinese manage to out-trade the US? China tightly pegs its currency's value to that of the dollar at an an extremely low rate. This low rate means that Chinese goods are very price competitive and this encourages a large bilateral surplus with the United States. This policy, in effect, offers a massive subsidy to exports. However, the Chinese need to purchase huge amounts of US assets by printing local currency. In 2006 alone, the Chinese central bank purchased around $200 billion in U.S. Treasury Bills and other securities. Currently, the Chinese are sitting on $1.2 trillion of foreign exchange reserves.
However, the Chinese can't keep on subsidizing exports in this manner. It is bad for poor Chinese workers, who are effectively subsidizing rich US consumers. It is bad for the US economy, which is building up huge liabilities with China.
The solution is simple enough. China must let the Yuan appreciate. American exports with China can begin to recover, while Chinese workers can begin to see real increases in their standard of living. However, the Chinese government seem addicted to this "export-at-all-costs" development strategy.
With every data release, recession is creeping closer. Today, the commerce department released March consumer spending data. Purchases gained just 0.3 percent from the prior month, less than half the 0.7 percent increase in incomes. The US consumer is at last beginning to realise that it has to stop spending, and start saving.
Are you ready to buy a new home? This realtor add tries to persuade you that now is the time to go out and buy. This add is rather like someone telling you to leave your cellar and walk into a force 5 hurricane. Personally, I am going to stay in the bunker. No house purchases from me, thank you very much.
But are you ready? Thought not.
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Somehow, I don't think we need to worry too much about interest only loans. They have become rather expensive lately. In fact, rates on interest only loans are almost the same as on 30 year fixed rate mortgages
However, go back to 2003, and interest-only loan rates were below 3.5 percent. Moreover, there was a significant spread relative to fixed rate loans - at times, the spread was 150 basis points. As the housing market wobbled and then crashed, that spread has declined. Today, there is little advantage taking on an interest-only loan.
Just one more reason why the housing bubble is over.
"The US central bank has yet to develop an exit strategy from the multi-bubble syndrome that the Fed, in its zeal for inflation targeting, has spawned.
Moreover, as one bubble begets another, excess asset appreciation has become a substitute for income-based saving — forcing the US to import surplus saving from abroad in order to sustain economic growth.
And, of course, the only way America can attract that capital is by running a massive current-account deficit. In other words, not only has the Fed’s approach given rise to a seemingly endless string of asset bubbles, but it has also played a major role in fostering global imbalances."
From Stephen Roach, Economist at Morgan Stanley, May 23, 2006
On Thursday, the Commerce Department published the grim reality. People are sustaining their unwarranted lifestyles by eating into their wealth. In 2006, the savings rate was minus 1 percent. Moreover, the dismal 2006 savings rate exceeded the negative savings rate recorded in 2005, when people spent 0.4 percent more than they earned. Statisticians have to go back to 1933 to find a lower savings rate. The savings rate has been negative for an entire year only four times in history -- in 2005 and 2006 and in 1933 and 1932. Now, does that sound like something that can continue indefinitely?
Hey! You've won a ride back to the top
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