Recession killer

[sdduuuude]

I found this article in the list of links. It is pretty neat. It suggests that MEW is having a major effect on imports, but not GDP. To me, this means a lower chance of a US recession in the near future and some really bad news for the Asians.

MEW and the Trade Deficit

I’m looking forward to his follow-up articles.

[powayseller]

CR makes an interesting case that since most of our consumption is foreign goods, any reduction in spending due to MEW will be felt by foreigners. This is why Roubini says when the US sneezes the rest of the world catches a cold.

However, let’s remember how we obtain the foreign goods. It takes ships, trucks, stores, personnel to deliver all those goods to us, so as imports decrease, so will profits of American retailers who sell us those imported goods Retail has been one of the biggest source of new jobs.

MEW has definitely been used to remodel homes, buy 2nd homes, and cars, so a reduction will hurt the construction and auto industry in this country.

Thus, a drop in MEW will hurt the US first, and then ripple out to the rest of the world, first to our suppliers (China, Germany), and then to their suppliers (Australia, Canada, other SE Asian countries). These countries will end up with fewer dollars to recycle. This is why I made that comment in CR’s comment section, that we will see less demand for US dollars, lowering bond and Treasury prices and raising their yields. (Of course, the drop in oil prices is going to lower imports in the next month, so the next drop we see will be due to falling oil prices not to the drop in imported goods.)

[sdduuuude]

Why will a drop in oil price lower imports?

[powayseller]

Sorry, I didn’t explain it right. I meant that dropping oil prices will lower the number of dollars coming in.

When oiil prices rose, Saudi and the other oil countries ended up with more dollars since oil is sold in dollars. So they needed to buy a lot more Treasuries and mortgage backed securities. The Federal Flow of Funds report shows more dollars flowing into the US during the period when oil prices were higher. Now that oil prices are falling again, there will be fewer dollars heading our way, lowering bond prices again.

[sdduuuude]

Thanks.

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