Tag Archives: USD

Exports, Inflation, and the USD

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This is what happens when non residents are scrambling to reduce their hoards of USD financial assets.

Exports rising like this along with the still falling dollar indicates the current $60 billion monthly trade gap is still too high – non-residents simply don’t want to accumulate USD financial assets at that rate.

This adjustment process continually aligns the ‘real’ (price adjusted) trade gap to levels that equal foreign $US ‘savings desires’.

For the US this currently means a weak USD and a combo of rising exports and rising traded goods prices.

GDP muddles through as government spending and exports support demand, with continuing weak domestic demand and declining real terms of trade crushing the US standard of living.

US Exports

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US Exports YoY


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Schmidt of RBS favors USD over Euro — a turning point?????

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Bloomberg News Video Clip

Maybe, but…

It will be tough for the USD index to move up without the CBs and monetary authorities buying it, and that means crossing Paulson and accepting being labeled a ‘currency manipulator’ and ‘outlaw.’

And the higher crude prices mean USD spent on imports increase and unless spending on US domestic assets, goods, and services goes up by that much those unspent USD need to be/are ‘saved’ by non-residents and the USD goes to a level that reflects their current desire to accumulate them.

A rising USD is evidence that the foreign sector wants the extra USDs and are fighting over them. A falling dollar is evidence of the reverse.

Also, if they don’t like the other currencies any more than they like the USD, the currencies can remain relatively stable as the excess USDs are all spent on US exports and US domestic assets. The evidence of this is rising/accelerating US exports and export prices and support for US assets which can include real estate and equities. Note the falling USD has made US equities that much cheaper for non-USD based investors.

This is all part of the same adjustment process, which includes ‘inflation’ as all the pieces described above support higher prices for goods and services both in the US and elsewhere.

And the ‘inflation channel’ also is part of the adjustment of the trade gap. I use the extreme example (hopefully it’s only an extreme example) of prices adjusting upward until coffee is $60 billion a cup, in which case the trade gap of $60 billion per month is only one cup of coffee. In other words, higher prices work to bring down the ‘real’ trade gap.

So they are all working together -trade, fx, prices- within current institutional arrangements (including CBs not wanting to be labeled outlaws and currency manipulators vs the desire to support their exporters, etc) as they always and continuously do to adjust desired to actual ‘savings’ of financial assets, and sustain all the indifference levels.

A turning point if the level of the USD is sufficiently low to drive the US exports and asset sales to non residents needed to keep their residual accumulation of USD to their desired levels.

And with crude prices still rising, it seems likely to me that more USD are being credited to ‘their’ accounts than they currently wish to cling to at current exchange rates, so more downward pressure on the USD would not surprise me. Along with the associated increase in US exports and higher prices in general.


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Watch for foreign USD borrowings

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It’s about that time of the cycle when emerging market governments borrow low interest USD rather than pay the higher interest rates of their local currency.

Makes no sense at the macro level by often the treasuries of these nations are incented to do this.

This external, USD debt tends to drive the USD down and add to US exports, as it adds to international financial instability.

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DXY and exports

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2008-06-03 Dollar Index vs US Exports

Dollar Index vs US Exports

Right – seems to me the dollar will fall until it’s at a level where the trade gap goes to about zero. So even though exports are way up and the trade gap down, there could be a lot more to go.

A nation can only run a trade deficit to the extent non-residents (governments and private sector agents) desire to net accumulate its financial assets (or buy its domestic assets such as real estate).

Seems to me Paulson, Bush, and Bernanke have successfully kept the world’s CBs, monetary authorities, and portfolio managers from actively accumulating USD financial assets.

Doesn’t seem like jawboning is going to alter foreign ‘savings desires’ apart from short term trading responses.


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Answer to the USD question

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Ed says:

Warren,

Isn’t it also true that the US export boom is less a result of the weaker dollar, so much as it is the cause? Foreigners using the trade surplus dollars they were previously content to save, are now spending them, and the shopping list is sizable. In this sense, all the dollars we have been exporting for years are coming home to roost, and that explains a good chunk of the inflation we are seeing.

Ed

I agree the cause is foreigners switching as a sector from wanting to accumulate USD to not wanting to accumulate them, and therefore spending them.

However, I see the market forces working as follows:

The first desire is ‘not to save’ which drives the USD down either until the $ is somehow low enough where they want to save it again, which doesn’t make sense to me, or until the USD is low enough for them to spend them here, which makes a bit more sense to me.

And the other force is the decreased desire to export to us which is evidenced by higher import prices.

Last, this is all inflationary, and inflation is the other channel for getting rid of a trade gap.

For an extreme example, if there is sufficient inflation for the minimum wage to go to $60 billion per hour, the real trade gap is suddenly down to only an hour of labor, though still nominally at 60 billion.

The combination of rising net exports, falling imports, and inflation are all working together right now to digest the sudden shift from CBs and monetary authorities away from buying USD financial assets.

Fiscal adjustment checks start going out in a couple of weeks.

Rest of govt. spending going up as well.

GDP should muddle through and inflation continue to accelerate.

It may dawn on the Fed that the weak dollar is hurting the financial sector as the consumer is being squeezed by food/energy prices and therefore having trouble making loan payments. That’s the price of sticky wages, at least this time around.

Foreign CBs have no option regarding world currency stability but to try to put pressure on the Fed to stop cutting.

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Re: Comments on G7 Statement on FX

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(an email)

>
>   On Sun, Apr 13, 2008 at 11:41 PM, Craig wrote:
>
>   Ok. So then it seems to me that it’d be a big change
>   for foreigners to panic on USD assets. Not saying it
>   couldn’t happen, but it’d need a big catalyst. In the
>   mean time, I suppose foreigners will peck away,
>   the dollar will do what it does and purchasing power
>   parity will provide some elastic limits on downside.
>
>   True?
>
>   Craig
>
>

Ironically, the ‘fundamentals’ of the $ are pretty good – purchasing power parity is good, the govt deficit is relatively small, and the relatively difficulty of getting $US credit helps as well.

But the technicals remain extremely negative (we’ve cut off the traditional buyers) CBs, monetary authorities, and chunks of our own pension funds.

So it’s not so much as concern about ‘foreigners’ in general, but specifically CBs and monetary authorities no longer accumulating perhaps $50 billion a month, and no one else stepping in to replace them, so instead the $ goes to a level where the trade gap goes away.

And that level of the $ can be anywhere, as while the correction process is ‘using’ the level of the $ to get the trade gap to 0, the trade gap is not that strong/precise a function of the level of the dollar.

It’s an example of a ‘cold turkey’ adjustment (the sudden cut off of all the $ accumulators at once) with no prior thought to the subsequent adjustment process, apart from the limited understanding that it would somehow drive exports, and the mistaken notion that exports are a ‘good thing.’

I do think the rest of the G7 thinks the ‘answer’ for the G7 is to convince the Fed to stop cutting rates.

As I mentioned a while back, the Fed has become an international ‘outlaw’ seemingly prodding the world to follow it in an international race to the bottom regarding inflation. It started the game ‘who inflates the most wins’ with their ‘beggar they neighbor’/mercantilist weak/$ policy to ‘steal’ (or maybe in the way the Fed sees it ‘reclaim’) world agg demand and support US gdp with US exports at the expense of foreign gdp.

Now it seems this policy is backfiring. The weak $ has seemingly raised food/energy prices for the US consumer, weakening the financial sector as less income is available for debt service as well as other consumption, and while exports have helped it’s only been enough to muddle through. And US inflation is sprinting ahead as well.

So the Fed rate cuts have not been seen to have helped the financial sector, the consumer, nor the US economy in general.

The Fed is being seen as destabilizing the world’s economy, weakening the US financial sector, depressing US consumer demand, depressing foreign domestic demand, and driving US to dangerous levels.

Once again it seems it’s being demonstrated that weakening your currency and inflating your way out of debt is not a road to prosperity.

And world markets are pricing in further US rate cuts.

Good morning!

Warren

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Money (USD)

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My take on the USD:

It was at a level based on foreigners wanting to accumulate $70 billion per month which also = the US trade gap (accounting identity).

Most of that desire to accumulate came from foreign CBs trying to support their exporters, oil producers accumulating USD financial assets, and foreign portfolios allocating some percentage of assets to USD assets.

Paulson cut off the CBs calling the currency manipulators and outlaws.

Bush cut off the oil producers by being perceived to be conducting a holy war.

Bernanke scared off the portfolio managers with what looks to them like an ‘inflate your way out of debt’ policy.

And US pension funds are diversifying out of USD into passive commodities and foreign securities.  Looks to me like the desire to accumulate USD overseas is falling towards zero rapidly.

This means they sell us less and buy more of our goods, services, and our real assets.

Volumes’ of non oil imports are falling and of oil imports are flat.

The dollar has gotten low enough for the trade gap to fall from over $70 billion to under $60 billion per month (February was an aberration IMHO).

The dollar will ‘adjust’ until it corresponds with a trade gap that = desired foreign accumulation of USD financial assets.

I see no reason to think the trade gap should not go to zero.

The USD probably has not traded down enough to reflect the zero desire to accumulate USD abroad.

The ECB has serious ideological issues regarding buying of USD.  Not the least of which they don’t want to give the impression that the USD is ‘backing’ the euro, which would be the appearance if they collected USD reserves.

The ECB has an inflation problem, and they believe the strong euro has kept it from being much worse.

The policy ‘shift’ might be the process of ending of US rate cuts at the next meeting by cutting less than expected.

This might first mean only a 25 basis point cut when the market prices in 50 basis points, followed by no cut when markets price in 25 basis points, for example.

This would firm the USD and soften the commodities near term, as after the last 75 basis point cut when markets were pricing 100 basis points.

But this does not change the foreign desires to accumulate USD as direct intervention by the ECB would, for example.

So the adjustment process that gets us to a zero trade gap will continue.

And it will continue to drive up headline CPI with core not far behind.

And US GDP will muddle through in the 0% to +2% range with weak private sector consumption being supported by exports, US government consumption, and moderate investment.

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Changing dynamics for the Fed

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Cutting 75 basis points rather than the expected 100 basis points gave the Fed positive near term reinforcement from market participants:

  • Dollar went up
  • Food/fuel/commodities went down
  • Stocks did ok, including housing companies
  • Credit did ok

But it’s going to look to the Fed a bit like taking medicine: initial small doses have the desired effect, then things settle back, and it takes ever larger doses to keep moving the needle.

So now crude/food is moving back up, the USD is moving back down, stocks are doing ok, exports are booming, and the fiscal package is about to kick in.

For the Fed to keep moving the needle away from inflation it’s going to keep needing to not give markets all they are anticipating.

So with a 25 cut anticipated, they will realize they need to do no cut for a positive inflation response, and with no cut anticipated they need to hike, etc.

Credit markets will quickly get ahead of this and begin anticipating hikes.

The irony is higher rates will help support demand via the interest income channel.

And higher rates will support price increases via the cost channel.

Demand is being supported by increasing net fed spending and rising exports due to the reduced desires of non-residents to accumulate USD financial assets.

They no longer want to accumulate a net $60 billion a month of US financial assets (negative trade gap) due to the big 4 screaming fire in a crowded theater of previously content patrons:

  1. Paulsen calling CBs that buy USD currency manipulators
  2. Bush making it politically impossible for Muslim nations to further accumulate USD reserves
  3. Bernanke giving inflation a back seat to ‘market functioning’ via deep rate cuts into a triple supply shock
  4. Pension funds diversifying to passive commodity and non US equity strategies
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Dow Jones: No mof intervention

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The MOF would have bought USD long ago if Paulson hadn’t gone around branding any CB a ‘currency manipulator’ and an international outlaw.

The USD is in freefall and is now the major source of inflation.

And maybe the Fed as seen the connection?

MOF Frets Over Yen, But No Hint Of Intervention

by Takeshi Takeuchi

(Dow Jones) Japanese currency authorities expressed alarm about the dollar’s fall close to the Y100-mark for the first time since 1995 but didn’t offer any clues about whether or when they might take any countermeasures.

Finance Minister Fukushiro Nukaga and his vice minister on currency affairs, Naoyuki Shinohara, separately voiced caution after the dollar fell to Y100.19 in the mid-day Tokyo session.

Nukaga said it is “a shared perception among the G7 (Group of Seven industrialized countries) that excessive exchange rate moves are undesirable,” while Shinohara also noted “excessive foreign exchange moves are undesirable.”

The two point men for Japan’s currency policy also said they will “continue closely watching foreign exchange markets,” a code phrase that shows their displeasure about current dollar/yen moves.

Neither of them, however, commented on whether they are considering taking countermeasures against the dollar’s rapid fall against the yen.

But Shinohara repeated the word “excessive” a few times in exchanges with reporters, suggesting the ministry’s level of caution has been at least raised in response to the imminent possibility of the dollar’s break below the Y100-mark.

In the past, finance ministry officials usually stepped up their currency rhetoric in stages before intervening. Their remarks on yen strength often changed from “rapid” to “a bit sharp” to “brutal,” while they also threatened “appropriate action” as an advance warning before intervening.

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Re: exports and the $

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On Jan 28, 2008 4:26 PM, Mike wrote:
> bottom line if trade deficit shrinks via export strength that has to be
> extremely dollar bullish-which has all sorts of implications (both of
> you are saying the same thing in that respect)…

sort of. it is shrinking as they are puking $ financial assets to
people who will take them to buy our stuff. so the dollar doesn’t go
up until they use up some of their $ assets and slow down their desire
to get out of them. think of it as an inventory liquidation of $
assets held abroad that drives the dollar down far enough to be able
to sell their $ to someone who wants to buy US goods and services or
US assets.

that’s the exit channel for $ held by non residents. for the US the
process is inflationary and expansionary- good for earnings and gdp.
But the inflation keeps the US domestic real consumption lower than
otherwise.

When the ‘$ inventory liquidation’ by foreigners starts to slow the $
starts to bounce back.

warren

♥

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