Global Imbalances

Brad Setser on the latest trade deficit number. He watches the global imbalance become more imbalanced--globally:

Roubini Global Economics (RGE) Monitor: I sure hope that the US is exporting a lot of "intangibles" that don't show up in the trade data, and generating lots more intangible dark matter to offset all the external debt that the US is taking on.

Because the tangible deficit sure seems to be growing.

Exports are doing fine. January exports are up 12% y/y. Boeing had a good month. And corn and soybeans seem to be flowing out of the mouth of the Mississippi to world markets again.

The argument that the trade deficit is growing because the world isn't growing doesn't hold water. Right now, strong global growth is propelling strong US export growth. Even with a stronger dollar.

But 12% y/y export growth doesn't cut it if imports are up by about 16% y/y - and non-oil imports are up 11.2% y/y.

The real story in my book is the continued acceleration in non-oil imports. Consider the trend in non-oil goods imports

(I'll try to put in a graph in a bit)

July: $116.2b (roughly the same as in the first half of 2005) August: $117.3 September: $120.2 October: $122.3 November: $121.5 December $125.35 January: $130.1b....

Annualized, the $68.5b monthly goods and services deficit in January works out to $820 b - or $100 b or so more than the 2005 deficit. I expect the strong(er) dollar will exert a drag on US export growth, which I expect to slow a bit. And barring a broader slowdown in the US economy, I don't see much that will lead to a sharp slowdown in import growth. Toyota looks poised to have a very, very good year. So I would expect the annual trade deficit in 2006 to widen just a bit, to maybe $840-850b. Throw in a transfers deficit of $80b and an income deficit of $70b - remember, the US has to pay interest on the $820b in net debt it took on in 2005, and the interest rate on the existing US stock of short-term debt is rising as well - and a current account deficit of close to $1 trillion is a very serious possibility. I honestly am not putting that number out just for effect; it is the number that is popping out of my spreadsheets....

There hasn't been any landing, hard or soft, to date. The biggest import market in the world is sucking in goods and services from everyone, propelling global growth.

With massive imbalances.

But, as Mark Gilbert has pointed out, in 2005 the bond market concluded that worrying about imbalances was something that other people should do, just like worrying about credit risk was something best left to those not actually in the market.

That has consequences. Without any market pressure to adjust, so far, the world has opted not to.