Thursday, February 20, 2003

Trade Deficits are a Complement-There was a lot of hand-writing in this WaPo piece on the latest economic numbers
The nation's trade deficit soared to a record $44.2 billion in December and to $435.2 billion for all of 2002, putting a significant damper on U.S. economic growth last year, the Commerce Department reported today.
It's not as bad as people think. One of the key points to remember is that a trade deficit is matched by an investment surplus. Given the choice between American goods and American investments, a lot of foreigners are choosing the investments, especially the Chinese.That trade deficit is possibly the greatest complement the world economy can pay the US; they like us so much, they want to buy the country (down, Pat, down!). The Chinese both have a more of a long-term perspective than Americans and have fewer reliable investment opportunities. Expect to see China have a trade surplus as long as the Communist government can change the rules of the game in mid-stream. Producer prices spiked up by 1.6 percent last month, but that was due to oil prices going up; in fact, the record trade deficit may very well have been set due to oil prices. If you take oil and food out of the mix, inflation was only at 0.5% for the year and 2.8% for 2002 even with the high oil prices. If you look at the bond markets, it looks like deflation is more of a threat than inflation. CNN should double-check its writing; they have a headline Inflation fears injure stocks right above Mortgage rates drop to record lows. With Treasury Bill rates just above 1%, you either have the markets setting a negative real interest rate (not logical) or they're predicting deflation for 2002. A quick interest rate primer: T-bill rates can be generally stated as a real rate of return (risk and inflation free, a "perfect world" interest rate, so to speak) plus expected inflation. Given that real rates of return are usually between 1 and 2%, that would indicate deflation on the horizon. On balance, this set of numbers is good news. Deflation will likely kick in for a bit once the Iraq thing is over and Venezuela returns to something resembling normal. The markets will get confidence once Iraq's over. 2003 should be a good year for the economy.

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