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  • Why The Current Account Deficit Helps Explain The Economics Of QE3 [View article]
    Hi American in Paris! Before I talk about inflation, we need to get our definitions straight. In the article I highlight that the $40 billion per month of purchases by the Fed translates into 18% year over year growth in the Monetary Base. Where that money goes from there is not knowable. It could re-generate an asset bubble in housing through low mortgage rates - certainly the lower mortgage rates will stimulate housing more than it otherwise would. It could end up in CPI with broad based inflation. It could continue inflating food and commodities. Rather than focus on broad based inflation (e.g. CPI), I focus on the magnitude of monetary expansion and its attendant distortions in the market. I think it is more appropriate to focus on the underlying economics and then watch and see where the "inflation" manifests itself. Prices will tell you. One thing I do know, is that monetary expansion of this magnitude is unambiguously good for gold. (see my recent article titled Gold Investing: What's the "Barbarous Relic" Really Worth?
    Sep 19 10:58 AM | 2 Likes Like |Link to Comment
  • European Sovereign Debt Crisis: Up Next, German Real Estate Bubble? [View article]
    Hi John-Erik horn,

    I was hoping to suss out some local intel on this one! I appreciate your perspective. That said, I think we should be careful in how we interpret GDP in light of the ECB actions and exceptionally low rates. While what you state is technically accurate, the ECB stimulus is very likely causing massive mis-allocation of capital (across Europe) from what a free market would otherwise decide. Over time, the government induced demand (or "investing alongside the government" as you say) eventually is satiated and the distance from where the economy is and where it needs to go to rebalance is farther and farther. And while it is encouraging that the banks in Germany are maintaining higher credit standards on the front end, and apparently German law makes it harder to get out of debt, it doesn't mean that the bubble can't pop and those holding the bag become indentured servants to their debts... and the banks holding those loans are nevertheless stuck with bad debt. Nevertheless, great commentary. Much appreciated!
    Sep 24 11:26 AM | 1 Like Like |Link to Comment
  • Why The Current Account Deficit Helps Explain The Economics Of QE3 [View article]
    The referent for comparison is an economy where exports = imports. The current account surplus country has exports > imports by definition. All the export companies perform well in this surplus country, thereby growing the local economy. In the case of China, their surplus is roughly $300 billion per year (down from a peak of about $500 billion). That's $300 billion worth of economic activity that they would not otherwise have had if their trade were in balance. Yes, the US is deflating the dollar, so foreign owners of dollar denominated assets are harmed. The question is whether or not a country lets the exchange rate adjust naturally through market forces or artificially through monetary policy, capital controls, etc. The latter has many mal-effects ranging from bubbles to market distortions to mis-allocation of capital which is another way of saying "GDP ain't what you think it is."
    Sep 19 12:27 PM | 1 Like Like |Link to Comment
  • Why The Current Account Deficit Helps Explain The Economics Of QE3 [View article]
    Just checked my source data again. From BEA and it is annual data. What you may be confused with is the trade deficit which is substantially larger. But from an economic persepctive, what really matters is the current account deficit because that tells us what is happening with ALL of our dollars that go abroad and come back.
    Sep 19 03:37 PM | Likes Like |Link to Comment
  • Why The Current Account Deficit Helps Explain The Economics Of QE3 [View article]
    Your analogy is perfect except for one thing. You are conflating the current account side with the capital account side. While they are mirror images, they have different impact on GDP. Like the bar bum buying on credit, the economy is indeed not better off when the bum skips out on the debt. However, persistent current account surpluses and deficits enable this game to go on for years and years. Nevertheless, there is a point at which it fails and the imbalances must be rectified, or else there are consequences. As I highlighted in the article, the capital account surplus can be invested in anything - so the surplus country can choose the timing, currency and asset class(es) they prefer. Their preferences for timing, currency and asset classes then dictate how the game plays out...
    Sep 19 02:32 PM | Likes Like |Link to Comment
  • Why The Current Account Deficit Helps Explain The Economics Of QE3 [View article]
    Yes, you bring up good points. The persistent Current Account Deficit puts the balancing mechanism into Limbo. To the extent that the imbalance corrects, it does improve our manufacturing prospects in the US. My own work suggests that if we closed the deficit to zero, the US would create between 7-9 million new jobs as that demand becomes fulfilled locally. The debauching of the US dollar very well looks like the beginning of the end for the dollar's status as a reserve currency. However, I would urge caution because there isn't yet a large, stable currency to take its place. One day, it could be the Renminbi, but that would likely be decades away. China has many problems itself that it must tackle between here and there.
    Sep 19 11:04 AM | Likes Like |Link to Comment
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