Straws in the wind
In the discussion of the current account deficit, commenter Homer Paxton has emphasised the importance of terms of trade, a point I’ve tended to neglect. As Barry Hughes points out in today’s Fin (subscription required) terms of trade (the ratio of world prices for the things we export to prices for the things we import) have improved steadily throughout the life of the Howard government, making their job a lot easier and meaning that the trade deficit is much smaller than it would be otherwise. Hughes thinks the terms of trade will turn down within the next year.
Meanwhile, the US bond market bubble may be just about to burst. Ever since Bush was re-elected, people have been losing faith in the assumption that somehow everything will come right. The people who really matter are the Chinese and Japanese central bankers who hold about a trillion in US government debt. The headline on this Observer story Japan threatens huge dollar sell-off is slightly alarmist, since the threats are being made by an LDP official, but the explicit reference to the need for higher US interest rates is the first I’ve seen coming out of Japan.