7 thoughts on “The US Current Account Deficit”

  1. Nima,

    Thank you so much for this post! It has given me a little better understanding of how China will be able to depeg its currency from the dollar. This is a topic I’d really like to hear more about in further detail.

    I’ve been hoping for a long time to hear a debate between Mish Shedlock and Peter Schiff on the topic of decoupling from the dollar. Mish seems to be of the opinion that it won’t happen and Peter thinks it will, but I haven’t seen a detailed explanation from them as to why they hold their beliefs. I respect both of their opinions and they seem to agree on a lot of things. Unfortunately, they only lob personal attacks at each other (Mish says Peter lost his clients a lot of money and Peter says Mish is trying to steal his clients), rather than debate the real economic issues.

    Mish has posted about the massive loss of jobs in China and people having to head back to the farms. So, I guess one reason he thinks that the Chinese won’t be able to depeg from the dollar is that the people won’t have the jobs and incomes to buy their own goods. What do you think about this? How long do you think it would take for the Chinese to get to a place where their people would be able to purchase their own goods and sustain their own economy if they allowed their currency to strengthen?

    Another disagreement between Peter and Mish seems to be whether the rest of the world is better or worse off than the U.S. On Judge Napolitano’s show earlier this week, Peter Schiff said that he believed that the U.S. was in worse shape than Europe. He was asked why, but never got to answer the question. This was disappointing since I was really interested in hearing his answer.

    From what I’ve read, it seems that the housing bubble (credit bubble) in Europe had been building for much longer than ours and is much larger than ours (scary considering how bad things are here). Mish has also posted about how overbuilt China’s residential market is. Additionally, people from around the world seem to be fleeing to the dollar as a safe haven because of the weaknesses in their own economies/ currencies (e.g. I posted an article a while ago on BTM about Russians being encouraged to buy dollars http://www.breakthematrix.com/Economy/Russian-Politician-Encourages-Citizens-to-Buy-U-S-Dollars-to-Rescue-Their-Savings). The reason I bring this up, is that it seems that another argument against decoupling is that the rest of the world is in worse shape than us.

    Do you have an opinion about whether Europe (and the rest of the world) is in a better or worse position than the U.S.? How will this effect the dollar and decoupling? The Fed and Congress are devaluing our dollars, but the rest of the world seems to be doing the same stupid things to their own currencies. What will the ultimate result be? Hyperinflation in the U.S., Europe, Russia, etc? A softer landing for China?

    Sorry for the long, rambling comment and I apologize if my questions are stupid. I don’t have a background in economics, but am just trying to read and learn as much as I can. With everything I’ve been reading and trying to digest lately, I think I’m suffering from information overload.

    Your blog is very insightful and well written. I really appreciate all of your hard work. Thank you so much!

    Laura

  2. Hi Laura,

    great questions. Let me try to respond as good as I can:

    On China/US decoupling:

    First of all, the disagreement between Mish and Schiff is in regards to the economies decoupling, not the currencies. The Dollar has fallen against from 8.27 Yuan in mid 2005 to now around 6.8 Yuan. So there is no question that the Yuan has depegged from the Dollar to a certain extent. This is due to the partial removal of the dollar peg that I mentioned in the post above.

    I think the question regarding the economies decoupling is pretty simple: There is no decoupling. As the US enters a massive correction, China will do the same. A lot of the goods produced in Chinese factories were produced to support lavish over consumption in the US. Those producers will have to find a new occupation, such as farming and production of more basic consumer goods.

    The current account balance is going through a major correction. From what it looks like, it could take until 2015 or 2020 until it is completely or close to balanced. It requires for US producers to produce more export goods and for China to cut back on export production, and instead import a lot of the new export goods from the US.

    Regarding US vs. the rest of the world:

    You are right on Europe. I think Europe is in terrible shape. Possible much much worse than the US. But when talking about Europe one has to know that there are huge differences between the European countries. Germany has not had a very noticeable real estate bubble. Spain for example has had an enormous one. Lots of European banks have invested heavily in the US real estate market. On top of that a lot of them made shaky investments in South America. It looks as though virtually all European governments are going down the same path as the US government. They are all convinced by the same false theories. Thus I only see the dollar moving further up against the Euro and even the Yen for the time being. We might at one point see such a thing as semi-global hyperinflation with a relatively stable dollar against other currencies. But for that to happen will take a very long time. Right now we are in deflation mode and it won’t end until the overpriced assets are completely deflated.

    Thanks!
    Nima

  3. Hi, Nima,

    Thanks for setting me straight on the difference between depegging of the currencies and decoupling of the economies! It all makes a lot more sense now. :)

    Although China hasn’t decoupled yet, do you agree with Mish that they will not decouple or with Peter that they may eventually decouple as they raise their domestic demand for products and begin to use their manufacturing capacity to produce products to meet that demand?

    Before I saw your response, I found a few interesting articles on China this morning:

    Does China Really Need the United States?
    http://www.safehaven.com/article-12769.htm

    US-Dollar Shines in a Depression, China buys Metals
    http://www.safehaven.com/article-12754.htm

    China – Better Days Ahead?
    http://www.safehaven.com/article-12753.htm

    There was also some good discussion in the comments on Mish’s blog today about China and decoupling.

    Regarding Europe, I agree with you. From what I’ve read, the UK and the Eurozone nations of Spain, Ireland, and the Netherlands all have really big real estate/ credit bubbles. I’ve also seen speculation about the Eurozone falling apart because the stronger economies such as Germany won’t want to support the weaker ones.

    Do you think there is any credence to the “world currency'” talk? If I recall correctly, French President Sarcozy was calling for a world currency last fall. Also, Ron Paul has questioned Bernanke about it. If there is any legitimacy to it, it seems like a good time for them to try to implement it since people are panicking around the world as their economies all fall apart. After all, Rahm Emmanuel did supposedly say you don’t want to let a serious crisis go to waste.

    Regarding the U.S. housing bubble, do you have any thoughts on when we will finally reach the bottom in the housing market? I thought that we would reach the bottom sometime in 2012/13 based on the Credit Suisse Mortgage Reset Chart. The more the government interferes, though, the deeper the declines in housing prices will likely be and the longer they will last. The government efforts to “put a floor” under housing prices and/or reinflate the housing bubble won’t work because, as you’ve said and as I’ve pointed out to my Congressmen on numerous occasions, Congress can’t force the banks to make more bad loans (though they are certainly trying) and they can’t force home buyers/potential borrowers to enter the market.

    Thanks for answering my questions! :) I really love your website.

    Laura

    P.S. Did you see that the House Financial Services Subcommittee is going to meet next week to discuss possibly suspending mark-to-market accounting rules?

    http://voices.washingtonpost.com/economy-watch/2009/03/report_house_panel_sets_hearin.html?hpid=topnews

    I hate when they say that there is “no market” for something just because it is not the market they want.

    And, legislation was introduced “to create a regulatory panel that would be able to suspend accounting rules such as the fair-value standard that financial companies have blamed for worsening the global credit crisis. ” It would be called the Federal Accounting Oversight Board and be made up of Geithner, Bernanke, Bair, and the chairmen of the Public Company Accounting Oversight Board and the Securities and Exchange Commission (Cox?) . (how scary is that?)

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aK1lxYsl4Vg0&refer=home

  4. Hi Laura,

    Thanks for the great input and links.

    On Decoupling:

    I wouldn’t really say that I see an outright decoupling happening. At least I see no historical precedent for something like this nor do I see how exactly it should play out. The US and the Chinese economies are very interwoven. If China had wanted to decouple it could have done so a long time ago by unconditionally rejecting the US inflation and not inflating in accord and devaluing their currency. Now China and the US are in this boat together.

    What I rather see happening is that the trade structure between the US and China will adjust. I think the gap in the US between imports from and exports to China will narrow down. (Don’t forget that China imported about $71 billion from the US in 2008.) Chinese people will begin importing more from and exporting less to the US. Notice how suddenly there is talk all over the news about China buying this and that? This is a pretty new phenomenon for the western world as far as I know. A cheap Dollar in terms of Yuans and collapsing prices in the US will be fueling this trend. The general direction toward a balance between the countries, I believe, is sort of preordained.

    I read the three articles you sent and I think that by and large the conclusions drawn in them support this expectation.

    Regarding a World Currency:

    It is certainly true that there are many things hinting at something like this. The central banks executives and finance ministers keep meeting on a regular basis now. If the European elites were able to sell to the European public the flawed idea of a pan-European currency, what keeps the international elites from doing the same to the world population? But in order for something like this to appear even remotely palatable a long worldwide PR campaign will be necessary.

    Right now, with all the trouble that these clueless people are dealing with, I just don’t see how they can stack on top of that the project of unifying the currencies of the world into one world currency. If anything, I think this will be a very very long term project.

    If you look at the description of SDRs (http://en.wikipedia.org/wiki/Special_Drawing_Rights), they already possess a lot of the features that the European Currency Unit had in Europe as a prelude to the Euro.

    I expect that if there is to be a concerted move toward a world currency, it will coincide with more and more talk about SDRs in the news and in the government propaganda all around the world.

    Regarding the US housing bubble:

    It is easier to say at what level we will bottom out. I think that a level at 75-100 for the case-shiller home price index is a realistic and sustainable level for home prices, based on historical data. At the pace we are currently going, I think we might get there around 2013 (http://www.economicsjunkie.com/wp-content/uploads/2009/02/home-price-index-december-2008.png) I don’t think that the government intervention will lower the final bottom for housing prices. All it does is to slow down our way down to those sustainable levels.

  5. Hi, Nima,

    Thanks again for answering my questions. I read the information on SDRs and will be watching/listening for stories to start popping up about them on cnbc and other msm.

    Regarding housing, I agree it is better to look at the level rather than timing (I’m concerned about timing, though, for personal reasons that I’ll tell you about below). I’ve been watching price/income and rent/own ratios here to see when we get to a good level. Regarding Case-Shiller — Mish actually had the new chart up yesterday (wow it’s late/early so I guess a day or two ago now). (It’s been really uncanny how every time I ask you a question, Mish has a post on it the next day. He even had one on mark to market.) Here’s the link to the current Case-Shiller chart: http://2.bp.blogspot.com/_nSTO-vZpSgc/SbTJkgzhdKI/AAAAAAAAFuk/Q8YEUc4JPMw/s1600-h/case-shiller-2009-02A.png

    If I’m understanding you correctly, you think prices will settle when they reach between 75-100 on the left hand side of the chart — so somewhere between mid 90’s and 2000 prices or when prices get back down to the levels they were at before they started their unprecedented climb.

    If this is correct, then I am in agreement with you that this is where prices -should- settle at sustainable prices. My only caveat would be that I think prices might go lower because of the government intervention (and because I believe prices will over-correct as public sentiment towards home buying changes with the mounting foreclosures). I’ll try to explain my reasoning as best I can. Please let me know where I’m wrong.

    Right now the government is misallocating resources by bailing out banks, automakers, etc. The government is also spending money it doesn’t have on “stimulus'” and expensive new social programs (e.g. health care). Eventually all of this money will have to be paid back, so at some point Obama will have to raise taxes. When people have to pay more taxes for all of the “free” new government programs they are getting, they will have less money than they otherwise would have had to spend on housing. This could possibly lead to even more foreclosures and higher inventories as already struggling borrowers have less money to pay their mortgages. Also because of higher taxes, potential buyers will have less money for purchases. All of this creates even more downward pressure on prices than would have existed if the government hadn’t acted.

    Additionally, if the government is successful in getting the “stimulus” money into the economy, couldn’t we see inflation in prices of necessities such as food and energy even while we’re seeing deflation in other things such as housing? Isn’t this what Ron Paul and Peter Schiff are always warning us about … that the government is devaluing the dollar so prices go up? It’s not really that the cost went up, but that each of your dollars is worth less so it takes more of them to buy the same thing. If people are paying more for food and gas, they will have less money to spend on housing than they otherwise would have had if the government hadn’t interfered. So, wouldn’t this again put more downward pressure on housing prices than if the government hadn’t interfered? The only way around this that I could see is if there was also wage inflation, but that seems unlikely when we are losing so many jobs. Well that’s my thinking anyway. Please let me know what you think.

    Timing … I guess I’m hung up on timing because I’m sick of renting and really want to buy back into the market and settle our family back into a home of our own. (We bought a townhouse in ’98. In ’04, we started looking to buy a single family home because we needed more space for our growing family. In ’06, I convinced my husband that we should sell our townhouse and rent a single family home while we waited for prices to come down.)

    Even though selling and renting made sense from a financial standpoint (we’ve been renting a house for less than half of what it would cost to “own” and have the proceeds from the sale waiting to put back into our next purchase), it has been very hard on/unstable for our kids. My son had to make/leave friends from 3 neighborhoods between ’06 and ’07 and change schools twice. (He had friends in our neighborhood in MD where he was born. Then, we moved to CA, where he started kindergarten and made new friends. Then, we moved back to MD and he had to start all over again at a new school for first grade.) He’s had a really hard time making friends this move because he knows that we are renting and will be moving again. He cried to me in first grade about how hard it was to keep making and losing his friends so it would be easier/less sad just not to make friends. He’s still having problems adjusting even though we’ve explained to him that we had put him in private school so that he’d be able to keep his friends because we intend to buy a house within driving distance to his school. (If we had put him in public school, he would have had to change schools if we moved out of the neighborhood). Even though my daughter is only 4, she’s also very concerned about when we are going to get our own house because she wants a pet and to paint her room pink. So, you can understand why I’m so concerned with timing. I just want my kids to feel settled and safe.

    I don’t necessarily want to buy at the bottom of the market, just when prices make sense for us and we don’t have to worry about taking out a suicide loan or risking our entire downpayment. Right now there is just still way too much potential downside. Luckily, we ended up in a nice house/neighborhood and have a good landlord who has agreed to rent to us again next year rather than put the place back on the market (he originally wanted to put it back on the market this year to take advantage of the tax break for selling a primary residence). Hopefully, we’ll be able to stay here until we decide to buy.

    Anyway, that is why I’m concerned with timing. I’ve been watching the Credit Suisse Reset chart because I don’t think we’ll reach bottom until after the bulk of ARMs reset and move through foreclosure.

    I also looked at the Case-Shiller Futures Data that Mish posted (http://2.bp.blogspot.com/_nSTO-vZpSgc/SbTCo8ZI6FI/AAAAAAAAFuU/7xhcf5VQRbY/s1600-h/case-shiller-2009-02-tcf.png) and it really depressed me. Although things look good for you in San Francisco — according to the data, they think prices will bottom this year at the 2000 level — it doesn’t look quite so promising for us in the DC area. According to the data, they think prices will bottom in 2011 at 2003 prices.

    Personally, I think 2003 prices are way too high. I first became aware of the housing bubble in ’02 when one of our neighbors (we lived in a close-in DC suburb at the time) put their house on the market for 50% more than we had paid in ’98 and sold it within 3 hours. Let’s just say I was shocked to see the asking price and to hear that people kept coming and trying to offer them more money after they had already accepted a contract. What was really unsettling, however, was that we even had some of the potential buyers crying and begging us to sell them our house. That was when I knew something was just not right and began to follow the housing bubble.

    Alright, well, it is almost 4 am here and my son will probably be up at 6. So, I’m going to try to get some sleep despite worrying about all of this stuff. Good night!

    Take care,
    Laura

  6. Hello, Nima,

    Just a few more thoughts on why housing prices might go lower than where they would have been sustainable if the bubble had not occurred:

    1. Government intervention to push a “homeowner society”, which started under Clinton (see the article from the Village Voice on Andrew Cuomo’s role while Sec. of HUD (ironic since he’s now the one going after the bankers as NY Atty Gen) under this thread: http://www.breakthematrix.com/content/Take-Taxpayers-Off-Hook-For-Rot-At-Fannie-Freddie-by-John-McCain) and continued under Bush, is what got us here. The government encouraged banks to lend to uncreditworthy borrowers by threatening them with redlining if they did not lend to low-income and minority borrowers– i.e. the government pushed banks into subprime lending. Meanwhile, Fannie Mae was allowed to violate GAAP by purchasing these subprime loans at prime rates — see the report linked in the main post about McCain.).

    The government also allowed “charities” to give (seller/builder-funded) 3% downpayment “gifts” to uncreditworthy/subprime borrowers so that they could get around the 3% downpayment required by the FHA — so they essentially got 100% financing. (I have links to articles on this if you want them.) So, all this practice really did was push up the price of houses for prime buyers because the cost of the “gift” was added back into the loan/price of the house, while putting people with no skin in the game into houses that they couldn’t afford. (The only thing good I can think of in the “housing rescue bill” last summer was the section putting an end to this practice, which had left the FHA with a deficit for the first time in its history. Unfortunately, HR 600 is trying to get the practice back on the books (See the movement to stop HR 600 here: http://ml-implode.com/sfdpacampaign.html ).

    So, now, not only do we have all of these subprime borrowers in houses that they couldn’t afford, but we have prime borrowers who, in a normal market, should have been able to afford conventional 30-year fixed loans with 20% downpayments seeking out risky ARMs and 100% financing. (The time to take out an ARM would be when interest rates are at all-time highs, not lows. Taking out an ARM when interest rates are at all-time lows is counter-intuitive because the only way rates have to go is up. Yet, this is exactly what happened.) As the insanity continued, we ended up with the Alt-A “liar loans” whereby people lied about their income to get into houses they couldn’t afford. (I mention “liar loans” in the last post on this thread and have a link to the article with the stats somewhere if you want.)

    Now, all of these people are going into foreclosure as their mortgage prices adjust upward and home values fall. They are unable to refinance because either their houses have lost value and/or they chose pick-a-payment loans which added any interest they didn’t pay onto the principle. Many of these people might have been future home purchasers, but they purchased during the bubble rather than when they would have been ready to buy — so I guess I’m trying to say the banks/builders borrowed future demand. This leaves us with a diminished pool of creditworthy potential buyers right now and while the correction will be happening because all of these foreclosed upon homedebtors won’t be able to reenter the market until the foreclosures are cleared from their credit records. Fewer available buyers = lower prices. (And, keep in mind that a lot of the creditworthy potential buyers are bubble watchers like me who are sitting on the sidelines and not planning to enter the market until a sufficient correction occurs — i.e. we’re not “knife catchers” or “greater fools”.)

    2. Right now, we have record numbers of foreclosures and record-high vacancy rates because of all of the overbuilding and speculation. Thus, there is a huge oversupply of inventory on the market which will only continue to grow. Record high inventory with very few creditworthy buyers = lower prices.

    3. High-paying FIRE economy jobs (real estate agents, mortgage brokers, stock brokers, etc.) are being lost as all of the Ponzi schemes collapse and I don’t think they will be coming back any time soon. As income goes down from all of the unemployment, people will have less money to buy houses. If these jobs are replaced with lower paying jobs than were available before the bubble started to inflate (e.g. Obama’s make-work jobs digging and filling holes), housing prices will have to go lower as well. Lower incomes = lower housing prices.

    4. This one is kind of like a chicken and the egg argument, but … banks already are insolvent and so don’t have the money to lend to current borrowers for current purchases. This is why they are keeping all of the bailout money to try and improve their balance sheets (at least the money they aren’t using for bonuses,parties, and sponsoring sporting events). But, they will need to lend to creditworthy borrowers to clear the toxic mortgages from their books and start bringing in interest payments to help recapitalize. But, if they are rightly being picky about whom to give loans out of an already very limited supply of potential borrowers, there will be fewer sales and, thus, lower prices. Again, fewer borrowers = less sales = lower prices.

    Maybe I’m being overly pessimistic (please tell me I am), but I just think this is the biggest housing bubble we’ve ever seen (e.g. We paid the same price to the seller of our townhouse in ’98 that he had paid for it near the top of the last bubble in ’90. He had paid 50% more for it than the original owners who bought it in ’87. Thus, it took 8 years for prices to recover from that much smaller bubble.) and thinking prices will stop falling when they get back to pre-bubble levels is a little too optimistic. Although I would love for that to happen and happen quickly. :)

    Thanks,
    Laura

  7. Sorry, Nima, just one more thought — and I promise I’ll stop bothering you about housing (at least for today :)).

    Someone brought up a good point on Mish’s comments today about the baby boomers looking to sell their real estate and move to cheaper locations/accommodations. This makes sense to me since they are probably worried about losing their jobs and being close to retirement especially since their pensions, 401(k)s, and other retirement accounts having lost so much value recently.

    The smart ones in this group — i.e. those who have owned the properties for a long time and didn’t refinance or take out HELOCs, should have plenty of equity in their houses to severely undercut the current market. They should be able to sell rather quickly and still make a healthy profit if they aren’t greedy and put their houses up for less than today’s asking prices. This could add further pressure on prices because of both the lower asking prices and additional inventory.

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