Monday, November 08, 2004
Macro - Latest
"...Lacking in domestic saving, America imports foreign saving to fund economic growth. The US must run massive current account deficits to attract that capital. With the external deficit having risen to 5.7% of GDP, the US is now absorbing over 80% of the world�s surplus saving."
Link. Just in case you didn't already know; it makes things like this happen.
"...China, which has $515bn of reserves, was also said to be selling dollars and buying Asian currencies in readiness to switch the renminbi's dollar peg to a basket arrangement, something Chinese officials have increasingly hinted at."
This would be the beginning of the End of the Dollar. Which would be the foundation for economic undoing of the US. The last hope, I think, to avert this, is a massive technological disruption manifested in a productivity boom...but as Roach points out:
"...Stripping out depreciation of obsolete capacity, net investment in the business sector in 2003 was 60% below levels prevailing in 2000 -- a serious warning flag on the productivity front."
So, as you probably intuitively know, there's little hope on that front.
Of course, Roach argues:
"...Let the dollar go. For an unbalanced world, rebalancing can only occur through a change in relative prices. The dollar is the world�s most important relative price, and, in my view, it has nowhere to go but down. Dollar depreciation is also part and parcel of a classic current account adjustment.
A weaker dollar will inevitably lead to higher US real interest rates -- providing long overdue restraint to interest-rate sensitive and asset-driven spending of American consumers and businesses. That will then lead to a rebuilding of national saving, thereby lessening the need to run large current-account and trade deficits that have, in turn, led to heightened protectionist risks.
A weaker dollar will also put long overdue pressure on the rest of the world to stimulate its own domestic demand -- both by embracing structural reforms and by backing away from the increasingly reckless and destabilizing recycling of foreign exchange reserves into dollar-denominated assets."
The point is that this is a nice medim-term effect, but it will be extremely painful in the short term for those who haven't already locked in most of their gains.