Oil (enough said). The November US trade data

China Trade Surplus Narrows, Signaling Growth to Cool http://www.bloomberg.com/apps/news?pid=20601089&refer=china&sid=aBF7nW4H7Dbk Jan. 11 (Bloomberg) -- China's trade surplus narrowed in December and money-supply growth dwindled, signaling that the fastest economic expansion in 13 years may have peaked. The trade surplus shrank to $22.7 billion from $26.2 billion in November, the Chinese customs bureau said in Beijing today. M2, the broadest measure of money supply, rose 16.7 percent to 40.3 trillion yuan ($5.55 trillion) from a year earlier, the smallest increase in seven months, the central bank said.

I may be a curmudgeon in pointing this out, but the real news to me is that real exports have fallen for two consecutive months--October and November--going by Exhibit 11 in the full report. On current trends (and barring a recession of Roubini-esque proportions), 2008's US trade deficit should comfortably surpass that of 2007.

Brazil's state-owned Petrobras soon to become Energy Export Superpower http://www.nytimes.com/2008/01/11/business/worldbusiness/11braziloil.html?ref=americas RIO DE JANEIRO — While some of the world’s largest oil producers, including Mexico and Iran, are struggling to remain exporters, Brazil is moving in the opposite direction. A huge underwater oil field discovered late last year has the potential to transform South America’s largest country into a sizable exporter and win it a seat at the table of the world’s oil cartel. Disclosure: I love my Brazil Petrobras shares, when I find more long term cash, Petrobras (stock symbol PBR) is still at the top of my list even with a 146 percent profit last year. By 2010, the Canadian Energy Ministry predicts $150 per barrel oil.

Where is the fallacy: Since US demand no longer sets the price of oil, a falling dollar will not cheapen US oil imports. In any case recession will not immediately reduce the physical quantity of demand much (inelastic demand). As such we will see a recession in the US, resulting in a falling dollar, resulting in higher oil prices, resulting in a worsening trade deficit, reinforcing the falling dollar and the recession, completing the loop. On top of that, the falling EROEI of remaining energy reserves acts to push up the price of oil in all currencies. This cycle should continue until there is genuine energy demand destruction. The conclusion is that a falling dollar will not lead to an export-led recovery until the US imports much less energy.

emmanuel -- interesting, interesting comment. I should have looked at that table. thanks

@T Yes !!! just what I have been saying for a while. This is going to be a totally new type of recession, one in which the oil price goes up as US growth falls, this has never happened in the history of the USA. Falling energy prices have been a key factor in reducing the severity of previous US recessions, but not this time. The US recession will have to get deep enough to drastically reduce the US's demand for oil, and given the lack of elesticity in oil demand, that could be a deep hole.

Since almost everything on Walmart's shelves is produced in China, an US recession may have the perverse effect of increasing the trade deficit with China. - DC http://www.businessweek.com/bwdaily/dnflash/content/jan2008/db20080110_407896.htm?chan=top+news_top+news+index_investing Wal-Mart Stores (WMT) offered a rare bright spot in the otherwise gloomy retail picture. Shoppers bought enough basic goods like food and discounted goods to lift the world's largest retailer past Wall Street forecasts, with a 2.4% sales increase. Eduardo Castro-Wright, CEO of Wal-Mart's U.S. division, in a pre-recorded conference call. "Our price leadership position was clear very early in the holiday season, and customers responded throughout the period to our pricing and merchandise offerings." The weak performance of luxury retailers reinforces a perception among some experts that the pain is spreading beyond the most vulnerable consumers.

I'm not economist but It seems that in Economical Theory if a currency is falling the trade deficit should fall too. But I have read in one economical book, that if a country need to export more he should invest more, and to save more. I think the problem, since the 80s, is that people spend more and more , save less and less, are more in debt. First, saving rate should raise, then invest, then export. But low Interest rate doesn't help.

Latest from Peter Schiff, It's Inflation Stupid http://www.safehaven.com/article-9199.htm Given Ben Bernanke's promise yesterday to supply substantive interest rate reductions, despite his belief that the U.S. economy is not headed toward recession (a claim that even the Fed Chairman obviously does not believe), inflation has been given much more room to run. Of course, the Fed's free money fest will not be sidetracked by today's data that showed the November trade deficit surging to $63.1 Billion (some export boom), limit-up moves in commodity prices (beans in the teens!), and 2007 import prices rising by 10.9%, the largest calendar-year increase since 1987. Basically the Fed is sending the message that inflation is going to get a whole lot worse and that it couldn't care less. As the price of gold continues to climb as a result, look for more excuses to minimize the significance of the move.

if a currency is falling the trade deficit should fall too. Not right away. See J Curve

guest, J curve may be part of the solution, but there should be other issues. from the Price-adjusted Broad Dollar Index from the fed U see. $ way below 100 in the 90s a high then Feb - Apr 2002 around 109 steady decline since then to a minimum of 92 end 2004 start 2005 little reconcaliation for the dollar to around 96 e.g. end 2005 since then further decline to ~85 The trade deficit was rising until 2006, despite the decline, started in spring 2002. How long should this J curve be? T's explaination is more likely, the rise in commodity prices has offset the effect of the dollar decline compared to expected development. I would like to add, that fast aging societies - e.g. China, Japan - have to have an trade surplus whatever it takes, e.g. are accepting much less ROI for saving then the US average. Of course that would have meant, that the gov has to save, if people don't want to...

Can anyone answer the following question: Are U.S. exports risng because the price of the goods is rising or because we are exporting more or different goods? It seems to me that we should not be pleased if we are exporting 13% more because the price of our agricultural products is skyrocketing. (It means the foreigners are outbidding us for essential products with our own paper!)

Sad congratulatons Brad, for Krugman is a little bit sad quoting you (courtesy of “curmudgeon Emmanuel"): "Maybe exports won’t save us" I’ve pointed out that rising exports, thanks to the weak dollar, were what allowed the US to avoid slipping into recession up through 3rd quarter 2007. But Brad Setser points out that real exports have stalled over the last few months (this is monthly non-petroleum exports in 2000 dollars, seasonally adjusted): Graph These data do bounce around, but it sure looks like export growth is stalling just when we need it to offset further declines in housing, consumer spending, and more. Thanks to you all and keep analyzing and explaining for us. XXX PS: Good sources and hard work are allways wellcome, now a days.

I agree with Dave Chiang. This is a poor time to try to keep up U.S. borrowing, which both the fiscal and monetary authorities seem bent on doing. What will happen when the baby boomers try to cash in on current social security and medicare promises? We are setting ourselves up for a situation in which the only way out will be to welch on debt on a huge scale. The Fed's excuse for using "core inflation" as its benchmark (food and energy prices bring too much unsystematic noise to headline inflation numbers), is inappropriate, because prices of food and energy are now rising faster than other goods and services in a systematic fashion.

koteli -- all credit should go to emmanuel, who noticed the data in exhibit 11 well before i did. all i did was to amplifly his observation.

Inflation is now running 4.3% year over year. It could easily jump to over 6% when the December figures come out. What would the FED do in the face of such numbers? Keep on lowering interest rates and send gold over $1000 and other commodities zooming upward? Shades of 1979/80. Or where is Volker when we need him?

amateur econ - exports are up compared to a year ago both in "volume" terms (meaning the us is selling more goods and services) and dollar terms (meaning the price of what the us sells has gone up). over the last three months, though, as emmanuel noted, us exports have been pretty flat in "volume" terms and total export revenues are only rising because of the rise in prices of some exports. I wonder how big the impact of higher grain prices is -- tis something that should be easy to check. mheck -- the adjustment in the US trade balance actually is pretty consistent with what one would expect. Remember three things: one, exchange rate changes tend to have a bigger impact on exports than imports (the best work on all this comes from menzie chinn); two exchange rate changes work with a lag (tow years is standard; the fall in the $ in late 07 will have an impact in 08 and 09); and three, the exchange rate has little impact on oil, which has a separate dynamic. That means that in 2003, for example, the rise in the dollar from through early 2002 was still influencing US export performance. It took some time before the post 02 fall really had an impact. the big fall didn't come until 03 -- which would impact 04 and 05. in 01 and 02, the $ was strong enough that the uS trade deficit would have tended to rise with normal rates of us and world growth. it took some time for that to work its way through. the dollar's fall though did start to have a clear impact on exports by late 03. indeed 03, 04, 05, 06 and 07 y/y export growth has been quite strong, as one would expect given the weakening $. However, the US started out in a whole, with bigger imports than exports, so faster export growth wasn't enough on its own. If imports are growing at 6%, exports needed to grow at 9% just to keep up. in 04, non-oil imports rose strongly on the back of strong us demand growth. that dominated the data. that tapered off in 05. and in 06 and certainly 07, non-oil import demand has slowed. remember, the expected impact of exchange rate changes on imports is relatively small. adjustment therefore likely required both a weaker dollar (to help exports) and a fall in US demand growth relative to world demand growth. once that happened, the non-oil deficit started to turn around. finally, there is the impact of oil. I think economists have underestimated its impact on the uS. the US economy is a bit less dependent on oil (oil/ gdp is down) than in the late 70s, but the US also produces less oil domestically than it did then. the result is, i think, that strong global growth has an ambiguous impact on the US trade deficit. It pushes up US Exports (As has been the case), but it also pushes up oil prices, increasing the united states oil import bill. and to the extent that the weak dollar doesn't correspond with a bit of overall slack in the global oil market b/c of weak us demand, well, the dollar price of oil may rise as the dollar falls, since oil is a global commodity and its real value would fall globally if its dollar price stayed constant when the dollar falls.

"We are setting ourselves up for a situation in which the only way out will be to welch on debt on a huge scale." drecon. you think that is a way out ? you actually make bombing auschwitz look like a smart idea. suppose every other economy followed suit ? where do we go next ? barter ?  have you mistaken this administration for a school of suicide bombers ? .

The average price of imported oil in 2007 is going to be a bit under $65 a barrel. 2007 or 2008?

T hit the target. Oil is the wildcard...that will put a crimp in the J curve. As for it being under $65/barrel, don't count on it! Sounds like Yergen talking. Check existing stocks now. But time will tell, won't it?

2007 for $65 a barrel imported oil (year average). we don't yet have data for december. the data through november put the average price at something like 63.5, v $80 for nov. dec price data (import price data that is) didn't show a further rise, but another month of $80 oil should push the average price up.

To Brad Setser and his blogging comunity I would like to bring the following appreciation to your attention as I think it is very apt. Dr. Setser, Thank you for continously enabaling an enlightening discussion that is apart from very few exeptions intelligent, datadriven, respectful and civil. BMH "If I had to nominate one blogger for the role of "hero", it would be Brad Setser. For years now, Brad has been painstakingly documenting the financial backstory of our times. Bubbles pop, this hedge fund fails, that central bank acts, blah blah blah. Every day another headline, but Brad has focused on the slow grinding of plates beneath, invisible to most but actually the source of the tremors. He approaches the task with a Sisyphean work-ethic, remarkable civility, and openness to new ideas and especially new data. (Brad's comment section also merits note. It is, I think, the best on the web, thanks largely to the caliber of the headline posts, and Brad's willingness to engage all comers as colleagues.)" steve randy waldman interfluidity 1/6/2008

Three cheers for Brad! Hip Hip - Hurrah! Hip Hip - Hurrah! Hip Hip - Hurrah!

The U.S. had a net liquidity deficit every year since 1950 (with the exception of 1957), up to 1976 (when the private sector contributed its first trade deficit ) These deficits were entirely the consequence of excessive U.S. government unilateral transfers to foreigners (re: foreign policy – solely our far flung military bases and personnel). During all this time the private sector was running a surplus in all accounts: merchandise, services and financial. The Vietnam Ten-year War administered the coup d’etat to our gold bullion standard. By 1968, in an effort to keep the dollar at the $35 par, we had exhausted nearly two thirds of our monetary gold stocks, or approximately 700 million ounces to about 260 million ounces. Although the dollar ceased to be freely convertible in March, 1968, institutional (central bank practices) and attitudinal lags were sufficient to offset, until late 1970, the excessive expansion in the supply of dollars. In August 1971, all convertibility was ended. This further accelerated the decline in the exchange value of the dollar. All fluctuations in exchange rates prior to this time were the result of other currencies changing in value relative to the dollar. My point is that the Pentagon by itself even today could force the dollar to fall. Since 1973 the principal culprit has been oil. Alfred Marshall, the Cambridge economists, is responsible for developing the cash-balances approach to money. For example, if individuals collectively desire expanding their cash balances (increasing the period over whose transactions purchasing power in the form of money is held), they will initiate a chain of events which will lead to a net reduction in their aggregate holdings of cash. That is, an over-all increase in the demand for money leads to falling prices, a decline in profit expectations, reduced borrowing from the banks -- and therefore a smaller volume of cash balances. Money thus is truly a paradox - by wanting more, the public ends up with less, and by wanting less, it ends up with more. All motives which induce the holding of a larger volume of money will tend to increase the demand for money - and reduce its velocity. Therefore, if there is a flight from the dollar, there will be hyperinflation in terms of dollar denominated assets.