Home > Analysis, economy, trade > The U.S. and the Dollar in numbers; how crazy, you decide

The U.S. and the Dollar in numbers; how crazy, you decide

$1.4 trillion out of thin air

The U.S. government has created out of thin air (“manipulated” into existence if you prefer) $1.4 trillion since September 2008 (around the time of the financial crisis) to March 2010.  (Source: U.S. Fed.) In December 2008, James Grant wrote an article in the WSJ criticizing the Fed “printing like mad … and is the wrong approach with potentially dire consequences.”

What’s the point? Everyone who hold assets denominated in dollar are immediately going to have their wealth diluted in proportion to the amount “printed” (it’s computer based now, and so the physical printing is no longer necessary).  China and Japan are the two largest foreign holders of American debt,  so the value of their holdings decrease.  The vast majority of holders of dollar denominated assets are in fact Americans.  Their purchasing power is now reduced.  Who is “manipulating” who?

For some Americans who do not want to be viewed as hypocrites, they should resist the urge to label China a “currency manipulator.”  Otherwise they should apply that label to the U.S. government first and then every other country on this planet.  Every country “manipulates” by “printing” currency, adjusting interest rates, and even indirectly by becoming more productive.

$-3.467 trillion net international investment position year-end 2008

“The U.S. net international investment position at yearend 2008 was -$3,469.2 billion (preliminary), as the value of foreign investments in the United States exceeded the value of U.S. investments abroad.” (Source: Bureau of Economic Analysis)

What’s the point? The world on aggregate is relying less on American capital.   If the U.S. government continue to spend uncontrollably, it will continue to support how this graph has trended in the last decade.

-2.5% savings rate in 2009

“In 2009, the broadest measure of domestic US savings – the net national savings rate – fell to a record low of a -2.5 percent of national income. This is the sum total of depreciation-adjusted savings by households, businesses, and the government sector.” (Source: Stephen S. Roach, chairman of Morgan Stanley Asia)

What’s the point? America is consuming more than it can afford.  Her budget is partly funded through borrowing from around the world, including China and Japan.  Will China or Japan be as willing to lend U.S. money if the U.S. do not run a current account deficit?  No.

90 countries U.S. run trade deficit with

While China is the largest trade deficit country for the U.S., there are actually 90 countries who the U.S. run trade deficits with.  This is a multilateral issue with the U.S. squarely in the middle of it.

Instead of counterproductive China bashing, the US would be far better served if it took a deep look in the mirror and faced up to why it is confronted with a massive multilateral trade deficit. America’s core economic problem is saving and it’s not China. (Stephen S. Roach, chairman of Morgan Stanley Asia)

What’s the point? The 130 Congressmen urging the Obama administration to label China a “currency manipulator” and take action against the yuan – in the eyes of the Chinese, they are behaving very irresponsibly to both the American citizens they serve and the U.S.-China relationship.

12% of China’s total trade is only with the U.S.

China’s trade with Hong Kong and Taiwan regions almost equal that with the U.S..  South Korea and Japan respective trade with China combined easily beats the volume between U.S. and China.  (Derived from US-China Trade Statistics)  U.S. only represents 12% of China’s trade with her partners.

What’s the point? U.S. media like to give Americans the impression that the U.S. is indispensable and that a trade war would only harm China.  It is commonly known that American corporations rely heavily on cheap Chinese labor to keep Corporate America competitive around the world.  A trade war between U.S. and China may shift America’s manufacturing to some other countries, or even bring some manufacturing back to the U.S., but what would be the net result?  It would certainly harm both countries and make them losers.

China’s savings rate at 30% to 40%

China’s savings rate is very high relative to the U.S.’s -2.5%.  At the 2009 Strategic Economics Dialog between the Chinese and the U.S. governments, they announced it was critical for China to encourage domestic consumption while the U.S. to encourage higher savings rate – to curb the growing trade imbalance between the two countries.

What’s the point? Very simple, indeed.  Americans need to consume less.  That will reduce U.S. imports from China.  Chinese need to consume more, and that will drive U.S. exports to China.  Again, Stephen Roach said it the best:

Currency, or relative price, adjustments between two nations are not a panacea for structural imbalances in the global economy. What is needed, instead, is a shift in the mix of global savings. Specifically, the US needs deficit reduction and an increase in personal savings, while China needs to stimulate internal private consumption.

Washington’s scapegoating of China could take the world to the brink of a very slippery slope. It wouldn’t be the first time that political denial was premised on bad economics.

What’s more?

Undoubtedly, China’s 8-10% GDP growth in the next couple of decades will increase Chinese consumption, even if the Chinese government does nothing further to spur them. The U.S. should sell more of what the Chinese want; certainly for those items the U.S. is willing to sell to France or Japan and so forth, there is no reason for the U.S. to restrict them when comes to China.

  1. r v
    April 8th, 2010 at 12:00 | #1

    I find the whole US complaint about its own economic problems as the result of other people’s misdeeds rather pointing to what some Americans have termed “the self-obsessed identity problem of Americans.”

    I give a simple example: GM and Ford are both losing money in US but making tons of money in China. Why? They are both competitive brands in China, but not in US.

    In US, GM and Ford’s competitors are not Chinese car makers, but Japanese and European car makers.

    American autoworkers are not losing their jobs to “outsourcing to China,” but losing jobs to their Japanese and European competitors’ workers in Japan and Europe.

    What’s the point of complaining about GM and Ford opening factories in China, when even American consumers rather buy from Japan and Europe?

    *the Currency problem is along the same line.

    rather than encouraging the US consumer to save, US has been addicted to the “consumption driven economic model” for many many decades.

    Even stimulus plans are now revolving around credits and stimulating purchase, rather than spending to improve and invest in infrastructure and development for recovery.

    Nothing wrong with stimulus plans themselves. China plopped down a huge sum of money for stimulus, but it spent its years of savings on massive infrastructure building and new technologies, rather than US government which gave banks bailouts and consumers tax credits so that they can go spend more money.

    The relative value of RMB and Dollar has nothing to do with the American spending habits, Government irresponsibility has led to the American irresponsible spending habits.

    Making the RMB more valuable, won’t make the American consumer save more or invest in infrastructures/businesses/technologies.

  2. April 8th, 2010 at 14:45 | #2

    @ r v

    Always interesting perspectives.

    American media seem to care less about Ford and GM getting beat by Toyota. They are up in their arms when shoes are not made by Americans. Perhaps it’s because there are some 50k U.S. troops stationed in Japan, and they feel Japan will cave at every whim of the U.S. Or perhaps they don’t yet see how dire a position the American automakers are compared to the Japanese ones (as the way others see it).

    But, then, as I’ve written few weeks ago, Toyota is targeted all the same:

    The U.S. witch hunt against Toyota, and a lesson for foreign corporations?

    “rather than encouraging the US consumer to save, US has been addicted to the “consumption driven economic model” for many many decades.”

    That’s a great observation, and I completely agree.

    “Government irresponsibility has led to the American irresponsible spending habits.”

    Indeed.

  3. r v
    April 8th, 2010 at 15:38 | #3

    When China went after US pork tainted by hormones and other crap, it’s protectionism.

    When Chinese drywall had too much stinky sulfur smell, it’s bad Chinese products. (Incidentally, sulfur dioxide is a normal byproduct of drywall manufacturing. US homebuilders were in too much of a hurry to actually let the drywall bake long enough to let out all the SO2 gas.)

    *
    That aside, US’s tendency to blame others for its economic troubles is only going to hurt US in the long run, in reducing its competitiveness.

    Sure, lots of things in the world is unfair. I didn’t get my dream job because some CEO wanted to hire his own nephew. So what?

    Maybe it’s the Chinese mentality in me, but I always prefer to improve myself and move onto better things.

    When it comes down to it, there are plenty of things in the world that has wronged each and everyone of us in life.

    But if we use these things as mere excuses, we don’t get better.

    I really admire the poor countryside people in China. They see the glitter of the cities with all the rich people. They know that some of those people got there through corruption and nepotism, but they don’t complain much. They just keep going, because they know there are still opportunities for them.

    There is a saying in the acting business: There are no small parts, only small actors.

    That saying can be applied to life in general. Everyday, we play our own parts in life, doing our jobs and tasks, no matter how small, every bit has meaning. Too much complaining, only proves that we are small in our soul, lack integrity in our work, do not take pride in doing good in every small perhaps even ordinary job.

    And if we are lacking in the small ordinary jobs, what possible great things can become of us?

  4. George Monser
    April 15th, 2010 at 03:21 | #4

    @YinYang, @Allen

    yinyang, re the $1.4 Trillion….Yes it’s huge, and yes it unfairly punishes the China et al who hold Treasury bonds. But think back to 13 months ago when the whole world’s economy was in free fall, and fear of Great Depression 2.0 was common. The US Government had to stimulate the economy any way that it could. That required spending without increasing taxes, and that led to the virtual printing of dollars that you speak of.

    I agree that “America is consuming more than it can afford. Her budget is partly funded through borrowing from around the world, including China and Japan.” So we need to stop spending like a drunken sailor. But spending habits change on the time scale of generations rather than years. All I can say is (1) US Treasuries are a poor investment, and (2) Don’t take “Washington’s scapegoating of China” to heart. It’s the usual political crap of blaming someone else for our own goofs, and we will both be dead before that changes. On a positive note, President Obama and Tim Geithner have dodged 130 Congressional protectionists, to the benefit of all of the countries that comprise the web of international trade. I feel good about that.

  5. Nimrod
    April 17th, 2010 at 23:33 | #5

    Free-floating exchange rates are supposed to use market signals to adjust behavior. However, they are just that, signals. Ultimately the actions are taken by the people, and they ought to know what is best for them with or without signals.

    American consumption may be a problem at the individual level, but that’s nothing compared to the amount of government spending. That’s exactly where the behavioral problem lies. So, it can be solved by those Congress-critters themselves, without detouring through China.

  6. April 18th, 2010 at 09:21 | #6

    @George

    “But spending habits change on the time scale of generations rather than years.”

    Agreed.

    “It’s the usual political crap of blaming someone else for our own goofs, and we will both be dead before that changes.”

    We are just hoping that would change – to make the U.S. better, and given the U.S. is the superpower, to make the world a better place.

    “On a positive note, President Obama and Tim Geithner have dodged 130 Congressional protectionists, to the benefit of all of the countries that comprise the web of international trade.”

    You mean them getting an extension to the report?

  7. April 18th, 2010 at 09:29 | #7

    @Nimrod

    Agreed. At the end of the day, the U.S. politicians really should step up!

  8. George Monser
    April 18th, 2010 at 12:37 | #8

    @YinYang

    yinyang

    Yes, the extension is what I meant. I hope that Obama and Geithner are postponing the decision on “currency manipulation”, until the matter is resolved through private talks among all of the countries effected, and the steam in Congress has cooled off.

    Regarding: “We are just hoping that would change – to make the U.S. better, and given the U.S. is the superpower, to make the world a better place.” I share your hopes somewhat – I think Obama is trying to make our country and its international policies better. As for Congress, I don’t know what the future will bring.

  1. No trackbacks yet.

Time limit is exhausted. Please reload the CAPTCHA.