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Tuesday, March 11, 2008

A Return To Boring Figures

The US import/export balance is slowly improving. The figures would look a lot better if crude prices weren't so high. Take a look at page 27 of this pdf trade balance report. In January 2007, crude oil imports unit price was 52.23. This last January it was 82.76. Ouch.

See also page 16 for the comparison of petroleum imports to overall imports. In January 2007, petroleum end use imports were 19.2% of non-petroleum imports. In January 2008, petroleum end use imports were 29.7% of non-petroleum imports. Another way to look at it is that petroleum end use imports increased 59% from January 2007 to January 2008, whereas non-petroleum end use imports increased 3.6%.

Over the course of the year, total US exports increased 15.9%. Total US imports increased 11.7%, so even with the sharp increase in imported energy costs our balance is improving.

The bottom line is that US trade balance would look much better if it weren't for the rising cost of energy. These figures strongly suggest that the US needs to find a way to meaningfully reduce petroleum imports while sustaining economic growth, and that if it doesn't, economic growth will be very constrained.

The Federal Reserve has announced a new initiative to deal with the market problems. This one seems focused on the agency paper problem:
Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS.
The auction winners will get to swap agency and non-agency MBS paper for a lesser amount of Treasuries. The Fed is also going to shore up some foreign CBs:
In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.
Effectively this puts a floor on how low agency paper can go. Since cutting the Fed Funds rate would not affect the ever-increasing spreads between treasuries and agency paper, this is a more effective response. Future rate cuts will probably depend on the indications of the overall economy, which are not great but not a disaster yet.

OK we devalue the dollar to increase exports, but that also jacks up the price of oil. Gas at pump goes up.

At home not only does oil go up at the pump, but because other nations can bid up the price of food, the consumer gets hit at the grocery store.

Those exports better go up a lot.
No, every other big economy is seeing the same. Oil prices are probably partly speculative, but also a function of political constraints on supply and increased demand.

We have the capacity to grow our own food, unlike some other nations. The ethanol adventure really is driving up the cost of food. But energy is an input cost to food as well. Energy multiplies the effect.

China just was hit hard by the blizzard, and their inflation is now reported at 8.9%. Jobs are a concern.

See Eurostat for European data. The Euro is relatively high which is helping the primary countries, but most of the satellite (EEM) countries are in deep trouble according to consumer confidence surveys.

The 2004 EEMs were Estonia, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, The Czech Republic, Hungary and Cyprus. In addition, there is special status for Turkey. Greece is another EEM.

The bottom line is that EEM countries had an average growth rate over recent years more than twice that of the older EU bloc. They are now getting hit disproportionately hard by the type of inflation we are seeing.

The hope is that the older bloc will pick up their growth rates to supplement, but it seems clear that overall growth rates in the EU would tend to slow regardless of the credit problems.

The bitch of a worldwide credit crunch is that the EEMs and EMs are disproportionately dependent on lending. We are all getting handed a reality check of sorts.

The strong Euro helps to suppress some types of inflation, but suppresses export growth, so they will become more and more dependent upon their internal islands of growth. That growth is partially dependent upon internal development funds which provided seed money supplemented by bank loans. See, for example, this Swiss document.

The end results are dependent upon how much internal growth impetus has been generated.

India's hit a snag in the road. The world situation is not dire, but stresses are emerging.

In general, higher commodity prices constrain consumer-side growth in lower income countries more.
Food is going to be a problem, world wide.


It don't matter what we grow if the dollar is so low that other countries can out bid us.

Unless a GOP led government and I am assuming the Dems will snatch defeat from the jaws of victory again this time, decides to limit exports.

OTOH, I now shop at ALDI http://en.wikipedia.org/wiki/Aldi

Which undercuts Walmart on prices.
Anecdotally, we've been doing well from the weak dollar. We've picked up 2 European distributors (which is a big deal for us) this year, because our prices are suddenly cheap and our product tends to be popular in Europe. I'm not talking about any big company or day job; I'm talking about a microscopic indie record company run in our spare time out of a corner of our living room. This kind of thing won't hit the trade balance charts because we don't actually report it to anyone except as sales and postage for taxes, but I bet we're not alone in this.
This also http://www.iht.com/articles/2008/03/10/business/bmw.php

GREER, South Carolina: Bayerische Motoren Werke, the world's largest maker of luxury autos, will spend $750 million to expand its South Carolina factory, increasing U.S. capacity as the dollar struggles against the euro.

The expansion will add 500 jobs at the plant, known as the Spartanburg factory, which will produce three models and expand capacity by 50 percent to 240,000 vehicles a year by 2012, the company said Monday. BMW plans to increase U.S. production while cutting workers in Germany, where labor costs are higher than in South Carolina, analysts said.
Joy, you can't be alone. Vader, FUT and the import figures show some basic production level investment is picking up.

So I think you two are describing a larger pattern. I'm not denying that we have economic problems. I'm just saying that the counterbalances are already coming into play.
With some luck, we can return
to expanded production here.

Don't want bank and financial firms bailouts like the S&Ls on taxpayer backs. Why isn't jail time and stripping your assets to live on basic Soc. Sec. level written into those contracts by now? Should go with the territory of handling a million+.

Smart Independent grouping --applied logic
and consequences
Smart Independent - you know what, we cannot afford to bail out banks that are trashed. The effort should be to support banks that are just impacted by the general environment, which really occurs from stimulating the general economy or providing liquidity when the financial nutcases have to suddenly sell out and temporarily blow up markets. Underneath the temporary pop there has to be a viable business.

But we have real problems. Everyone talks about the S&L "bailout", but actually the institutions were permitted to fold and then the RTC managed the liquidation.

You really cannot bail out a bad bank. They can lose money faster than you can print it.
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