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.

8 thoughts on “Straws in the wind

  1. Howard, apart from the Asian crisis wobble and the new economy bubble, has been very fortunate in having a favourable international environment. Cheap cost of capital, cheap secondary import prices, higher primary export prices and now the revived AUD. Its all been very welcome political news to Costello, but not to his professional credit.
    Does any one have a graph of our terms of trade, as they have moved from mid-sixties Ming to mid-noughties Howard? This could let us recalculate the movements in the Current Account Deficit under Howard using the average post-Keating Terms of Trade to calculate our current tradeable values.
    It would be interesting to run the trend line of our ToT from the glory days of competitive manafacturing and high primary goods prices through till now. The recent spike in primary goods prices has certainly been a welltimed bit of good fortune.
    It would also be interesting to recalculate our import bill before the deflationary impact of pre-info-tech revolution price competition cut our import bills. The new economy certainly came at the right time for those worried about the high price of imported manafactured goods.
    Even more interesting would be to recalculate our Capital Account using average global interest rates in the post-Keating era. Interest rates have dropped by half in the post Cold War era, partly due to global competition for loanable funds driving down financial institutions wholesale margins and partly due to massive surpluses from NE Asia.
    A shift to higher global interest rates and lower export/higher import prices would make for an interesting ride. There is a certain aspiring PM burnishing his economic credentials who might find this embarassing.

  2. Jack –
    The Hughes article in the AFR has such a chart & also does some of the recalculations of our CAD you refer to.

    Never mind the Yanks people, haven’t the Japs got themselves into a huge pickle once again? They bought dollars because a Yen rise would flatten their recovery, but the more they buy the bigger their eventual losses. Their strategy now seems to be ‘hold on and hope for the best’.

    The ‘can-do’ Japanese of the 1960s and 70s now seem to get into continual trouble through indecision and procrastination.

  3. Indeed it’s a tricky problem, and not only for the Japanese. Relative to GDP, Singapore and Taiwan are even more exposed.

    Everyone is quietly edging for the doors, hoping to sneak out with at least some of their assets intact before the real run begins.

  4. Why is it that every time there is a big financial shakeout in the world the Big End of Wall Street seems to walz away with a sack load of loot? The Japanese took a bath when they bought US commercial real estate in the late eighties. The Asians have taken another bath since 1998 when they bought into an overvalued equity and security market using overvalued $USD.
    And when Wall Street gets into trouble the Fed just acts like Auntie Samantha and bails the Street out (eg S&L scandals, LTCM, Mexican Debt etc). The fast money got out of equity and into property PDQ around December 2000.
    Wall Street never misses a trick. I guess thats why they are all so rich there.

  5. You guys crack me up.

    Whilst you begrudgingly admit that the past and present economic situation is (only just) OK you condemn the conservative governments by the results of your own future projections.

  6. Jack, Wall St has had a lot more practice than the Japanese, Asians etc. Not to mention that they have had the advantage of the $US being de facto global currency for some time.

  7. The disaster that has befallen China Aviation Fuel Co. on the Singapore Exchange where it has been caught out by derivative trading may be the first sign of trouble. With losses in the $100m the banks that backed this company (a consortium of Singapore and other asian banks) may be running for cover as I type.

  8. the staggering thing of just how strong out terms of trade are is if we had the same terms of trade in the banana republic days then the currebt account would have been in surplus!

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