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EJ
01-15-07, 02:08 PM
PM eyes regional trade pact (Update 2) (http://www.theaustralian.news.com.au/story/0,20867,21065497-601,00.html)
January 16, 2007 (The Australian)

AUSTRALIA would join a free trade zone of 16 Asian and Pacific nations under a plan for a landmark East Asia economic bloc being pushed by Japan.

The free trade area - stretching from Japan to China, India, Southeast Asia, Australia and New Zealand - would cover almost half of the world's population, three billion people, with an economic output of $9 trillion.

Speaking at the East Asia Summit in The Philippines yesterday, John Howard said the Japanese idea of an East Asia free trade bloc, which would rival the European Union and the North American Free Trade Agreement, was discussed at the meeting and that Australia "supports the feasibility study being carried out".

"It's a done deal that we are going to have an East Asia Summit. People today were talking about what it should do and were no longer marvelling that it was happening."

AntiSpin: An aging, US-centric, dollar unilateral, modified WWII era global monetary system is about to go through its next stage of stress. When trade among large and fast growing Asian countries increases, relative dependence on US consumers for demand for their exports declines along with their incentive to finance US trade deficits via purchases of US financial assets. At an average annual growth rate of 7% versus 3% for the US, the $9 trillion Asian free trade area will catch up to the US in about 2013 at around $14 trillion. Demand for US debt will decline by 20% to 30% between now and then. The US does not have to do badly to create a crisis. All that needs to happen is for the rest of the world to continue doing well relative to the US.

The US needs: imports made cheap by inexpensive non-US production export block labor–especially Asian–and low interest rates maintained by demand for US treasury and agency debt by the export block, foreign purchases of US treasury debt to finance deficit spending, and the demand for dollars created by the conversion of export block currencies to dollars to purchase dollar denominated assets.


http://www.itulip.com/images/cpi1978-2004.gif
Relative CPI inflation: traded versus non-traded goods

http://www.itulip.com/images/grossexternaldebt.jpg
An economy with $12 trillion in annual output carries $10 trillion in external debt. Accountants among our
audience will appreciate the Treasury Department's creativity in labeling the largest line item figure on the
sheet, one that's nearly two times the size of the next largest item–$3.1 trillion–to "Other Sectors."

http://www.itulip.com/images/majorforeignholderstreasuries.jpg
Of the $2.2 trillion in foreign owned Treasury securities outstanding, between Oct. 2005 and Oct. 2006
the UK doubled down, increasing their bet from $100 billion to $207 billion while China stepped in with
a 12% increase from $302 billion to $345 billion, perhaps not coincidentally only a few billion more
than Japan's 4% cut from $667 billion to $641 billion. An innocent could be forgiven for seeing in these
numbers the USA's partner in Iraq, the UK, helping the US avoid the pain of monetizing its own debt
to pay for th Iraq war, while China sends a message about limits to the Asian trade block's willingness
to vendor finance US consumption of Asian exports.



The relative increase in interdependence among export block nations and corresponding decrease in dependence on the US for demand creates three inflationary biases in the US economy.

Inflation Bias #1: Without cheap imports to balance rising non-traded goods and services inflation, net CPI inflation may rise in the US.

Inflation Bias #2: With less foreign demand for US debt, the US needs to purchase the treasury debt created to pay for government spending, especially the wars in Afghanistan and Iraq. The US monetized its own debt during the Vietnam War, resulting in 36% inflation over six years.

Inflation Bias #3: Without foreign purchases of US debt, the demand for dollars to pay for foreign purchases of US debt will decline. The dollar will depreciate as a result, requiring more dollars to pay for imports, especially oil.

The US can choose to, 1) reduce spending, 2) increase taxes, 3) inflate, or some combination of the three. This without any doomsday scenario, only a continuation of 30 year trends.

That's without a recession that lowers demand for imports. What if a US recession 2007/2008 occured to slow demand?

Jim Nickerson
01-15-07, 03:20 PM
The relative increase in interdependence among export block nations and corresponding decrease in dependence on the US for demand creates three inflationary biases in the US economy.[/b]

Inflation Bias #1: Without cheap imports to balance rising non-traded goods and services inflation, CPI inflation will rise in the US.

Inflation Bias #2: Without foreign purchases of US debt, the US would need to purchase the debt it creates to pay for deficit spending, especially the wars in Afghanistan and Iraq. The US monetized its own debt during the Vietnam War, resulting in a 36% inflation over six years.

Inflation Bias #3: Without foreign purchases of US debt, the demand for dollars to pay for foreign purchases of US debt will rise.

The US can choose to either, 1) reduce spending, 2) increase taxes, or 3) inflate. Or some combination of the three. This without any doomsday scenario, only a continuation of 30 year trends.

Inflation Bias #3 does not make sense to me. If there is not foreign purchase of US debt, wouldn't that make the demand for dollars decrease as opposed to making the dollar demand rise?

Ed
01-15-07, 04:25 PM
This is a somewhat relevant point of interest, I think. Over the years/decades in our USA, consumers spend a greater fraction on wants, and a lesser fraction on needs. So, in the event of serious backwards for our USA, it would seem there is more room/fraction for economic contraction.

jk
01-16-07, 12:31 AM
At an average annual growth rate of 7% versus 3% for the US, the $9 trillion Asian free trade area will catch up to the US in about 2013 at around $14 trillion. Demand for US debt will decline by 20% to 30% between now and then.

on what basis do you assert that demand for u.s. debt will decline, and decline by 20-30%? the growth of the asian region and intra-asian trade would presumably reduce the relative dependence of the region on exports to the u.s., but not necessarily the absolute level of dependence. [btw, a lot of chinese imports, for example, are of producer and intermediate products which are then processed and exported to the u.s.] even if asian consumption booms, the industries which depend on exports would presumably still exist and still benefit from those export markets, and still be earning a lot of dollar income [in the absence of u.s. consumption constraints, i.e. recession]. those dollars would have to be recycled. so, again, why do you assume that demand for u.s. debt will decline, and decline by 20-30%?

FRED
01-16-07, 01:21 AM
[/b]on what basis do you assert that demand for u.s. debt will decline, and decline by 20-30%? the growth of the asian region and intra-asian trade would presumably reduce the relative dependence of the region on exports to the u.s., but not necessarily the absolute level of dependence. [btw, a lot of chinese imports, for example, are of producer and intermediate products which are then processed and exported to the u.s.] even if asian consumption booms, the industries which depend on exports would presumably still exist and still benefit from those export markets, and still be earning a lot of dollar income [in the absence of u.s. consumption constraints, i.e. recession]. those dollars would have to be recycled. so, again, why do you assume that demand for u.s. debt will decline, and decline by 20-30%?
Because demand is more geopolitical than economic. Who do you see on this list buying more than 5% of GDP worth of US treasuries that doesn't have either a short term economic interest–vendor financing or economic leverage ala China and Korea–or strategic interest–protection money ala Israel–or both ala Japan. Italy, France, Germany, etc., have single digit investments. Germany, at 1%, really stands out. Perhaps the "most deep and transparent bond markets in the world" rule that is typically used to justify why US bonds are so popular does not apply to them, or Sweden, France, Italy, The Netherlands, or any of those "Old Europe" countries. (Gosh, we're gonna miss that guy, aren't we?)


http://www.itulip.com/images/treasuryholdingvsgdp.jpg

spunky
01-16-07, 08:35 AM
I dont have that much faith for that many different cultures to get their acts together and cooperate. It sounds good on paper, but really :confused:




Remember the eurozone is a much more homogenous bunch than the economic zone this is proposed for Asia . Also you have the most active muslim militants in that area, yes more so than the middle east. You postulate and place all the charts you want but when it boils down to; it is still humans who need to agree and cooperate . :cool:

EJ
01-16-07, 08:56 AM
I dont have that much faith for that many different cultures to get their acts together and cooperate. It sounds good on paper, but really :confused:




Remember the eurozone is a much more homogenous bunch than the economic zone this is proposed for Asia . Also you have the most active muslim militants in that area, yes more so than the middle east. You postulate and place all the charts you want but when it boils down to; it is still humans who need to agree and cooperate . :cool:

They aren't creating a unified currency. All they're doing is creating a trade zone. They can and will do so. Put yourself in their shoes. If you're going to run a trade surplus with another country, would you not rather that country not require you to lend it the money it needs to buy your exports? Funds earned from trade are better invested in the domestic economy, or lacking the ability to absorb som much efficiently at home–one of China's problems–invest it in the sovereign debt of countries whose GDP is growing 7% or 12% versus 3%? If you were China, would you not want to diversify your risk away from a single "customer"?

Readers who missed it on the economists on the US Consumer series (http://www.itulip.com/forums/showthread.php?t=808) can get a better understanding of what's behind foreign purchases of US debt by exporters from this article by Dr. Peter Morici, one of the economists that Jane Burns interviewed for the series.

Why the US Trade Deficit is so large and why it matters
(http://www.finfacts.com/irelandbusinessnews/publish/article_10003604.shtml)
Apologists for the trade deficit argue that it indicates the strength of the U.S. economy, because it is financed by productive investments in U.S. industry. That is less than half true. Most of the capital we import to finance our nearly $800 billion dollar current account deficit goes into foreign holdings of U.S. securities—U.S. government bonds, bank deposits, corporate bonds, and the like. These now total about $5 trillion dollars and are growing at a pace of about $500 billion a year—that’s more than half the trade deficit. And not all of these are private investors seeking haven from the uncertainties of foreign capital markets—remember about $395 billion of those $500 billion in paper assets purchased in 2004 went in the coffers of foreign central banks.

At five percent a year, the debt service comes to $250 billion and that debt services increases at about $25 billion a year. Do you think our kids should be saddled with that? If so, feel comfortable in the knowledge that borrowing for a wild spending spree on imports today to saddle your kids with debt is building a sound America for tomorrow.

Further, persistent U.S. trade deficits undermine U.S. growth. These shift employment away from export and import-competing industries, which enjoy higher productivity and pay higher wages. Trade deficits are a key reason why the wages of most workers with only a high school education or a few years of college have barely kept up or lost ground against inflation during the recent economic recovery.

U.S. manufacturers are particularly hard hit. Cutting the trade deficit in half would create nearly 2 million more manufacturing jobs. An effective policy to end currency manipulation and cut the trade deficit would particularly benefit highly competitive U.S. durable goods manufacturers, such as producers of machine tools, industrial and construction machinery, auto parts, and electronic equipment.

U.S. import-competing and export industries spend at least 50 percent more on R&D and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from these trade-competing industries, the trade deficit is reducing U.S. investments in knowledge-based industries and skills and handicapping U.S. growth.

Slashing the trade deficit in half would add more than one percentage point to U.S. productivity growth and potential GDP growth each year.

jk
01-16-07, 10:54 AM
Because demand is more geopolitical than economic. Who do you see on this list buying more than 5% of GDP worth of US treasuries that doesn't have either a short term economic interest–vendor financing or economic leverage ala China and Korea–or strategic interest–protection money ala Israel–or both ala Japan. Italy, France, Germany, etc., have single digit investments. Germany, at 1%, really stands out. Perhaps the "most deep and transparent bond markets in the world" rule that is typically used to justify why US bonds are so popular does not apply to them, or Sweden, France, Italy, The Netherlands, or any of those "Old Europe" countries. (Gosh, we're gonna miss that guy, aren't we?)

ej,

the distribution of current holdings of u.s. treasuries doesn't tell me that the purchase of treasuries will slow.

china has internal geopolitical problems. the most recent plan seeks to reduce the huge differentials between the fast-growing coastal regions and the interior, and more generally between the urban and rural economies. china has a huge employment problem with 100million/yr migrating from rural to urban areas; and china has a huge latent unemployment problem with millions still working at non-economic state operated enterprises.

therefore, china will not imperil the jobs of workers in the export sector. if u.s. consumers have the dollars to buy chinese goods, china will accept those dollars and then be forced to somehow recycle them.

the u.k. holdings have significant components residing in the london-based investment offices of the petrocountries. again, if the u.s. buys oil with dollars, the sellers must do something with those dollars. you might say that the oil producers can start selling in euros or rubles or any other currency. that will reduce demand for dollars in transaction accounts, and thus weaken the dollar. but as long as the u.s. can buy oil for dollars, or even exchange the dollars for euros to buy oil if necessary, someone ends up with dollars and they must recycle them.

the only way for purchases of u.s. treasuries to decline is either 1. fewer dollars are sent abroad, i.e. u.s. consumption of imports declines; or 2. the asset mix purchased by foreign dollar holders is changed, e.g. the pboc starts buying equities or farmland instead of bonds. since you have specifically said that foreign purchases of treasuries will decline even in the absence of a recession, i think you are left with option 2 unless you want to posit that foreign countries start to REFUSE TO SELL their products to the u.s. in another thread i posted a piece about cb's looking at the purchase of equities and other asset classes beyond bonds. so are you then positing this kind of diversification, or something else?

Charles Mackay
01-16-07, 11:37 AM
Nice Analysis.

Although the bond market was the vigilante in the last stagflation, I think we need to look at gold, commods, and the dollar to be the vigilante this time around. I'm sure they'll figure out another carry trade or similar manuever to hide the old bond vigilante from coming out of it's hiding.

WDCRob
01-16-07, 12:18 PM
2. the asset mix purchased by foreign dollar holders is changed, e.g. the pboc starts buying equities or farmland instead of bonds. since you have specifically said that foreign purchases of treasuries will decline even in the absence of a recession, i think you are left with option 2

Isn't this the driver of EJ's POOM? Or is there another way for the megaholdings of US dollars to arrive back in the US?

jk
01-16-07, 01:01 PM
Isn't this the driver of EJ's POOM? Or is there another way for the megaholdings of US dollars to arrive back in the US?
poom has been linked to "the dollars come home", so i think you're right: that's the mechanism for even bigger asset inflation in the u.s. if it's not going into bonds, though, whether treasuries or mortgage backed, then the inflating asset is no longer housing but whatever those dollars go into. my question for ej, though, is for him to make explicit whether this is indeed what is behind his prediction of a decline in foreign purchases of u.s. bonds, if so what will cause such a shift, and also where the "20-30%" figure comes from?

akrowne
01-16-07, 06:54 PM
Eric,

When measuring any genuine notion of US "output", you can safely subtract off the degree of annual borrowings from abroad (which is illicitly counted towards the GDP). At $800tln/yr now, this means US output is definitely 7% or so smaller than the $12.5 tln typically claimed).

bart
01-16-07, 10:20 PM
Eric,

When measuring any genuine notion of US "output", you can safely subtract off the degree of annual borrowings from abroad (which is illicitly counted towards the GDP). At $800tln/yr now, this means US output is definitely 7% or so smaller than the $12.5 tln typically claimed).

Got a link?

I've heard this twice before but have as of yet to find source material. I'm not doubting you, just hopeful that you have a link.

spunky
01-17-07, 01:34 AM
Sorry EJ, the " bloc " part had me cornfused. :p Curious to see how this flys in the wifes hometown of Cebu.

lewman
01-17-07, 09:53 AM
What does it mean by "the US needs to purchase the treasury debt created to pay for government spending, especially the wars in Afghanistan and Iraq. The US monetized its own debt during the Vietnam War, resulting in 36% inflation over six years."

Pls explain. thanks.