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1 A Bird Eye View of International Liquidity: J.D. Han King’s University College, UWO

Dec 14, 2015

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1 A Bird Eye View of International Liquidity: J.D. Han Kings University College, UWO Slide 2 Sources of Global Liquidity n 3 Major Sources of Global Liquidity 1) Developed Countries accumulated Pension Funds 2) Oil Money 3) Trade Surplus of U.S.s partner countries, mainly, China (call it separately U.S. dollar liquidity). 2 Slide 3 n The 3 rd one or U.S. Dollar Liquidity is the most interesting as it is related to the domestic (U.S.) economic and monetary conditions. 3 Slide 4 4 Growth Lack of Investment Managed FOREX Consumption Rises; Savings lags Government Budget Deficits rises Current Account Deficits Export Promotions Savings Glut Capital Flows low interests Asians buying U.S. finan/real Assets External Liability Position Imbalance Current Account Imbalance Current Account Surplus (U.S.)(Asia, etc.) (offsetting) 1. Current Fundamentals of World Economy 9.11 Slide 5 5 2. Flows of Goods, and Money in opposite directions U.S. is a voracious absorber of world products particularly from the East Asia; Socio-political stability of U.S. depends on mass consumption. U.S. Trade Decifits (Import in excess of Exports) has been the largest and increasing rapidly while the East Asian countries have been accumulating Trade Surplus with U.S. - International Currencies(monies) flow to the East Asia The East Asia is becoming the Factory of the World Slide 6 6 198719972004 n U.S.-1,607-1,409-6,681 n EU 15 Countries 252883477 n Japan8449681,721 n Asia 7 Countries 1) 2843671,678 (China)3370687 (Taiwan)18071186 (Korean)101-84276 n Latin America-98-668173 n Middle East OPEC -73141909 Note: 1) China, Taiwan, Korea, Singapore, Malaysia, Thailand, and Indonesia Data : IFS, Bloomberg (100 Million $) U.S. Trade Deficits are increasing. World: Current Account Trends of Major Countries Slide 7 7 Current Account Trends of U.S.: Ever Increasing *There is a big decrease in CA deficits to $390 billions in 2009 due to recession. Slide 8 8 Note : 1) ( ) has the share in the world Sources : IFS, Bloomberg 19872004 10 Largest Deficits -2,254(84.5) 10 Lagest Deficits -8,719(92.9) n U.S. -1,607(60.2) n U.S. -6,681(71.2) n Canada -134(5.0) n Spain -492(5.2) n U.K. -126(4.7) n U.K. -419(4.5) n Saudi Arabia -98(3.7) n Australia -400(4.3) n Australia -80(3.0) n Turkey -155(1.7) n India -52(1.9) n Italy -151(1.6) n France -44(1.7) n Greece -131(1.4) n Argentina -42(1.6) n Portugal -127(1.4) n Norway -41(1.5) n Hungary -88(0.9) n Denmark -30(1.1) n Mexico -74(0.8) (100 million U.S. $; %) U.S. is actually the only country which can afford to have perpetual trade deficits: Slide 9 9 Note : 1) ( )has the share in the world Data : IFS, Bloomberg 19872004 10 countries 1,862(96.6) 10 countries 6,343(73.6) n Japan 844(43.7) n Japan 1,721(20.0) n Germany 469(24.3) n Germany 1,034(12.0) n Taiwan 180(9.3) n China 687(8.0) n Korea 101(5.2) n Swiss 602(7.0) n Swiss 63(3.3) n Russia 599(7.0) n South Africa 51(2.6) n Saudi Arabia 315(6.0) n Kuwait 46(2.4) n Norway 344(4.0) n Mexico 42(2.2) n Sweden 285(3.3) n Netherlands 42(2.2) n Singapore 279(3.2) n Malaysia 26(1.3) n Korea 276(3.2) (100 million $, %) Worlds Current Account Surplus countries are either oil producing countries or U.S. factories. Slide 10 10 198919972004 EU 15 countries 10( 0.9)167( 9.2)1,045(16.0) (Germany) 80( 7.3)186(10.2)459( 7.0) Japan 490(44.7)557(30.5)752(11.5) Asian 7Countries 333(30.4)795(43.5)2,270(34.8) (China) 62( 5.6)497(27.2)1,620(24.9) (Taiwan) 130(11.9)122( 6.7)129( 2.0) (Korea) 63( 5.7)-19(-1.0)198( 3.0) Latin America 92( 8.4)64( 3.5)841(12.9) Middle East OPEC 43( 3.9)-2(-0.1)221( 3.4) Others 128(11.7)245(13.4)1,387(21.3) (Canada) 99( 9.1)179( 9.8)668(10.3) Total 1,096(100.0)1,826(100.0)6,517(100.0) Note : 1) minus (-) indicates the U.S.s surplus Data : U.S. Government China has big surplus with U.S., and deficits with Japan, Korea, Taiwan and oil producing countries. (100 mil. $, %) U.S. has concentrated Trade Deficits with Chin and East Asia. Slide 11 Updated statistics can be found in many places, such as n http://www.epi.org/publications/entry/international_pict ure_20100211 http://www.epi.org/publications/entry/international_pict ure_20100211 n http://www.census.gov/indicator/www/ustrade.html http://www.census.gov/indicator/www/ustrade.html 11 Slide 12 Once again, the major characteristics of U.S. Dollar Liquidity 1) U.S. has long-standing and increasing Trade Deficits with the world. 2) U.S. trade deficits with China and East Asia are growing fastest. 12 Slide 13 Lets think about some additional questions: 1. What will be the limit to the U.S. trade deficit? ; How come the US can increase the trade deficits so much without any constraint? 2. Is there any interconnection between X-M, and S and I? ; What about the causation in the above relationship? Which causes which? 3. How come this flow of funds and the shifting of production(=income generation) from the U.S. to East Asia does not decrease the National Income of the U.S.? ->Is the partnership byy design or by chance? -> Why would the situation where the U.S. trade deficits are concentrated with East Asia be better than the hypothetical one where the U.S. trade deficits are evenly distributed across countries in the world? 13 Slide 14 14 U.S. and East Asia: Mirror Image of Macroeconomics Variables: Savings, Investment and Trade Deficits Blue- Saving Red Investment Orange Current Account Observation: 1)In U.S., Current account Deficits(Up), Strong Investment(Up) and Under- Savings(Down): Over Consumption. 2) In East Asia, Current account Surplus(Up), Weak Investment, Over-Savings: Under-consumption. (the mirror image of U.S. ) (not a mirror image of U.S., except for Trade Balance) Slide 15 For above Question3: What is happening to the component variables in the following equations? East Asian Countriess GNP Y = C + I + G + X - M U.S.s GNP Y = C + I + G + X - M 15 Slide 16 The bottom line is that n U.S. Over-consumption is funded by East Asians Under- consumption or Over-savings. n That is not all about the story. 16 Slide 17 For Q 4, and Q5, we will have a separate appendix for the National Income Accounting 17 Slide 18 How come can the Trade Deficits go one forever without having big negative impacts on U.S. economy? n In U.S., trade deficits mean U.S. $ leaking to China, reducing Money Supply and having deflationary impacts on U.S. economy. n To offset this decreasing money supply, U.S. might have to print out U.S. $: Then, U.S. domestic money supply may recover, but world supply of U.S. dollar rises, having downward pressure on U.S. $s external values. 18 Slide 19 U.S. Dollars External Value n The absolute values have fallen substantially, but the real weighted value against major countries has not fallen very much. 19 Slide 20 20 U.S. : Current Accounts and Currency Value FOREX Slide 21 21 3. Flows of Capital n International Liquidity does not stay invested in the East Asia -Monies are flowing back to U.S. n This fuels U.S. imports from Asia n This gluts U.S. financial market, pushing Stock Prices up and Interest Rates down Slide 22 22 U.S.: Net External Liabilities (Debts) =Credit from the rest of the World Slide 23 23 Data: U.S. Government Documents 1990~941995~99 (A)Post 2000 (B)Net (B A) Total2,7105,89018,2809,690 n Asian Countires 1,2003,010 9,5006,490 n European Countries 1,1504,280 4,880 600 n Latin Americans 2101,080 1,470 390 (100 mi. $) Who are buying U.S. Bonds? Slide 24 n The U.S. Dollar has kept up its value pretty well in light of the worsening Current Account. Why? n If capital does not flow back from East Asia to U.S., the U.S. Dollar may have lost more values. ->Numerical Exposition is given separately. -> This is related to the concept of Above the Line External Equilibrium. 24 Slide 25 n What ultimately affects FX rates and others in the external sector is not Trade Balance, but Above-the-Line Balance of Payment. n Above the line BP = Trade Balance + Spontaneous Net Capital Inflows 25 Slide 26 Spontaneous Capital Flows n You may over-consume (more consumption that income) through imports of foreign goods. n However, as long as the foreign countries give you Credit(lending Money-back-to you), you can continue the over-consumption. n Behind it lie the confidence of foreign countries and your self-confidence (in your future income capability). n Foreigners are investing on your future. 26 Slide 27 27 Growth Lack of Investment Managed FOREX Consumption Rises; Savings lags Government Budget Deficits rises Current Account Deficits Export Promotions Savings Glut Spontaneous Capital Flows Current Account Imbalance Current Account Surplus (U.S.)(Asia, etc.) Current Fundamentals of Global Liquidity Creation 9.11 External Liability Position Imbalance Slide 28 Spontaneous Capital Inflows reflect confidence in U.S. economies n Because China sends U.S. $ back to U.S., U.S. does not have to print out money by that amount. n To that extent, it creates jobs in U.S. in finance of global investment management. n By the amount of U.S. $ liquidity flow back, U.S. does not have to print out that much of money. 28 Slide 29 n This kind of Division of Labor between U.S. (managing finance) and China(producing goods) is based on an implicit design between the two parties. It is noticed by sharp reporters, and political economists.sharp reporterspolitical economists n Without this, U.S. would have i)Deflation domestically; and ii) Rapidly declining value of U.S. Dollar externally. 29 Slide 30 Thus we can say that n the current setting of U.S. Dollar Liquidity is serving good purposes for the U.S. part. n Most of outcries about trade deficits and Chinese undervalued FX rates may be just rhetoric(al).rhetoric 30 Slide 31 The ultimate problem lies in Chinas Conflicted Virtue, not U.S. Deficits n McKinnons Concept of Conflicted Virtue McKinnons Concept of Conflicted Virtue ->China will have the danger of Liquidity Trap n Erturks paper Erturks paper -&