Massive US trade deficit - Recipe For Disaster
- Thread starter gamalruach
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Inflation is generally attributed to the growth of the income and money supply. Our money supply hasn't increased much over the last year or so (it has been around an annual rate of 1% or so, though it did manage a monster increase in February). Income (GDP) has been slow until the last 6 months. Unemployment has been higher than during the boom (though it's not clear what the natural rate of unemployment is....it's generally accepted to be around 5% but there is some debate). All of these signs point to low inflation.
So, we have low inflation because the fundamentals are there for it.
Now, with regards to interventions, the buying of dollars decreases the money in circulation, which could ease inflation. I don't have data for the Japanese interventions, but I am going to speculate that a large number of dollars were bought by Japan in the last six or eight months. This could account for some of the money growth stagnation.
Given the recent "perking up" of the US economy, we may see some growth/inflation/employment growth in the near future. It should be noted that the expected inflation is about 2.7%.
These are just some thoughts. The topic of inflation is a great deal more complicated than this. However, it's been a helluva week and I'm really tired. So some of the above discussion may not be precisely accurate, and I apologize.
What is the bank of Japan doing with all the $'s? Sit on it, untill sometime in the far unforseeable future the yen needs to be defended against the dollar? Economics 101 is a long time ago..
Hanseng1 goes on to make some good points, and suggests his numbers might be incorrect.
I'm uneasy about disagreeing with one who clearly knows more about econ than I, but while the Fed had been tightfisted recently (for a few months), it appears that our money supply has been inflating quite a bit. Here's some data:
Currently, M1 thru M3 stand at non-seasonally adjusted values for Jan `04 of 1288.1, 6066.5 and 8868.8 respectively (all money supply numbers in Bs).
Jan 99 (that is to say, 5 years ago), they were 1098.3, 4429.6 and 6024.3 respectively. That is an annual increase of 3.24%, 6.49% and 8.04% (compounded yearly).
Further, in Jan `03 (that is to say, one year ago), they were 1220.1, 5829.9 and 8562.3. That's increases of 5.57%, 4.06% and 3.58% over the past 12 months, when the Fed has even choked up the market just a bit. Interesting to note the slower growth in the more abstract Ms. I don't know what (if anything) that means.
But it appears from the Fed's own data that we're getting much more than 1% more money per year. Unless I have erred, or there is better data?
Actually I was referring to the more recent numbers (seasonally adjusted); I'm sure your numbers are correct.
The increase has been small over the last six months or so, with a substantial decrease in the seasonally adjusted M2.
The picture shows what I was referring to; the money supply has been growing very steadily since the mid 1990s, with a "flat spot" over the last several months (severe currency interventions?). The rate of growth was increased, as shown here and also as expected by the monetary expansion over the last several years.
I don't know why it leveled off (or declined when seasonally adjusted). I've heard a couple of different theories, and the mass intervention idea seems logical since this is roughly when the dollar tanked versus the yen. I have no evidence to back this up, however.
A great site for the Feb data is:
http://research.stlouisfed.org/index.html
The increase has been small over the last six months or so, with a substantial decrease in the seasonally adjusted M2.
The picture shows what I was referring to; the money supply has been growing very steadily since the mid 1990s, with a "flat spot" over the last several months (severe currency interventions?). The rate of growth was increased, as shown here and also as expected by the monetary expansion over the last several years.
I don't know why it leveled off (or declined when seasonally adjusted). I've heard a couple of different theories, and the mass intervention idea seems logical since this is roughly when the dollar tanked versus the yen. I have no evidence to back this up, however.
A great site for the Feb data is:
http://research.stlouisfed.org/index.html
BOJ is buying US treasuries hand over fist to keep the dollar "strong" to protect Japanese manufacturing and export industries. Future generations of US taxpayers will be paying for the retirement of future generations of Japanese workers. Unless the unthinkable happens and the US Treasury defaults on (some of) its debt obligations. That would be sure to correct the valuation of the USD, but probably a bit too quickly for everybody involved.
hanseng1: Excellent post! Very clear and well written!
Sam
trade4succes: great question! and a timely one.
Some indicate that Japan's entire structure of buying dollars/intervention of weakening the yen is going to blow up in their face. Literally.
If it does (for instance, if some event causes the USD to suddenly tank 5 to 10 cents) the interrelated effect on the yen could trigger a shake up in the currency market (I predict a massive one) the proportions of which may make the 1997 Asian Currency Crisis look like a picnic.
The BOJ's mound of USD debt would be one of the main dynamics of there being above 20 cent moves across all the major pairs.
Probably mostly based on hysteria/panic trading as opposed to actual economically structural called for fx adjustments.
Sam