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Sebastian

The Us Exports Its Deficit

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'The US dollar has spent much of the past 6 months hitting record lows against most of the world’s leading currencies, including the pound, the euro and nearly all of the major commodity currencies: the Australian dollar, the Canadian dollar and the Norwegian Krone. The US currency has fallen 20% against the Canadian dollar (the US constitutes 80% of Canada’s exports) since March, 15% against the Australian dollar since August and 7% against the euro in the past 7 weeks. Although the dollar is the weakest of the major currencies in the world this year, US politicians have grown more vocal about the weak Chinese currency (primarily a fixed rate currency allowed to trade within a narrow band with the US dollar) and have been pushing legislative bills to penalise China for its apparent currency manipulation. Yet, is the US guilty of a similar offence and is it allowing its currency slide into the abyss, deliberately. With the US dollar index at an all-time low, many would argue the currency has already reached the abyss, yet having the worst current account deficit per capita of any leading economy, does the US Administration really want a stronger dollar?'

Full article at http://bobandted.blogspot.com/

This is particularly topical, with current concerns of European politicians on the high value of the euro and complaints from the US Administration on China's yuan valuation.

Edited by Sebastian

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This is particularly topical, with current concerns of European politicians on the high value of the euro and complaints from the US Administration on China's yuan valuation.

The nation was founded by welching on debt, why should the present lot persue any other course?

(sorry, cheap shot, we're all cousins, yadda yadda PC flannel group-hug)

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Does that mean that Canada has effectively lost 20% of 80% of it's income from exports due to currency movements alone?

Add in to the equation further losses due to lack of competitiveness and it's got to hurt.

Seems to be a sure way to start a global recession.

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Does that mean that Canada has effectively lost 20% of 80% of it's income from exports due to currency movements alone?

Add in to the equation further losses due to lack of competitiveness and it's got to hurt.

Seems to be a sure way to start a global recession.

Well, it probably means Canadian companies are taking a big hit on their corporate profits. Some manufacturing and lumber companies tha operate off smaller margins will simply go ot of business. We won't really see the true impact of the currency appreciation in Canada until the end of the year - October will be the first month where the US and Canadian dollars began at parity. We won't see October's trade report until the 2nd week in December.

It will hurt and because Canada is an export-dependent economy, it may find itself going down the tubes quicker than the US.

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you just never know. I am sure a lot of bigger exporters will have forward contracts in place so it could take a while for the effects of the exchange rate to be felt.

Edited by edwardbear

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you just never know. I am sure a lot of bigger exporters will have forward contracts in place so it could take a while for the effects of the exchange rate to be felt.

You would think so, but the sheer pace and magnitude of the Canadian dollar appreciation will have caught many by surprise. I know that when the Canadian dollar made its initial sharp move back in April/May, many exporters were caught off guard and had not bought forward. Back in August during the credit crisis when USD/CAD was at 1.0850, it looked like the pair were headed towards 1.10 or 1.12. Nobody imagined or predicted the exchange rate would be at 0.9750 within a matter of weeks and I'm pretty sure most exporters would have got caught.

The big problem for Canadian producers now is not only do they have a major competitive battle on their hands in terms of maintaining their levels of exports to the US, but they also have to try to fend off US producers that are now looking to the Canadian market as a major new prospect. 50% of Canada's exports are made up of commodites and a pronounced slowdown in the US (weakened demand) combined with a sharp fall in US dollar-denominated commodity prices will spell disaster.

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I said this a very long time ago, and i was laughed at, yet again some one takes my idea.

It may be more a shocking truth perhaps than an idea. What I find fascinating about the whole story is China, which seems to hold all the aces, no matter what way you look at it.

Edited by Sebastian

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It may be more a shocking truth perhaps than an idea. What I find fascinating about the whole story is China, which seems to hold all the aces, no matter wat way you look at it.

Seb, I've always enjoyed reading your posts on the markets. I'd appreciate your views on what on earth is driving stocks ever higher in the face of increasingly bearish news.

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The nation was founded by welching on debt, why should the present lot persue any other course?

(sorry, cheap shot, we're all cousins, yadda yadda PC flannel group-hug)

Because it is leading to a shift in the world's wealth. If China is saving money and the US is borrowing money and the money that's borrowed by the US comes from China, then China will get wealthier and wealthier at America's expense. Nothing wrong with it as such, except China would appear to have the more superior strategy, don't you think?

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Well, it probably means Canadian companies are taking a big hit on their corporate profits. Some manufacturing and lumber companies tha operate off smaller margins will simply go ot of business. We won't really see the true impact of the currency appreciation in Canada until the end of the year - October will be the first month where the US and Canadian dollars began at parity. We won't see October's trade report until the 2nd week in December.

It will hurt and because Canada is an export-dependent economy, it may find itself going down the tubes quicker than the US.

Higher prices for oil & gas should cushion the blow to an extent though...

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Seb, I've always enjoyed reading your posts on the markets. I'd appreciate your views on what on earth is driving stocks ever higher in the face of increasingly bearish news.

Hi Tuffers,

I think we have to look at the sequence of events. The markets were due for a correction and that was what we should have been witnessing back in August. The subprime issue developed into a liquidity crisis and suddenly what should have been a timely market correction became a wholesale financial market crisis. The Fed comes riding into the storm with goods to bear and markets suddenly see Mister Bernanke as Father Christmas and not as the seasonal bearer of bad news about the health of the economy. The Fed played a shocker in reality and their response smacked of a Fed preoccupied with calming market volatility, moreover acting in the longer run interests of the real economy. Markets read the Fed's response as giving license to print money and to buy risk, and a lot of it, regardless of the underlying fundamentals. The dollar was ditched in the process. The crazy rally we have seen since August in my view is merely a bout of euphoria, built on a false premise. We are now higher than we were, so in essence we have seen no market correction at all. Yet the economic fundamentals tell us something is not quite right, so it says to me, we are now due a 'serious' correction.

When you release a greyhound from the traps, it will sprint after the hare, whether the hare is real or not. Eventually this greyhound will run out of breath and eventually stop, or in extreme cases collapse with a coronory, but usually only after it has done several rounds of the track. Markets were in this same trap back in August and when a confused Fed pulled a rabbit from its hat, that darn dog kept running and running, largely chasing its own tail. And, I, for one, await the coronory.

Edited by Sebastian

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yes, Canada will suffer greatly.

"Canada, our biggest trading partner, is letting its currency rise. The Canadian dollar, the loonie, has reached parity with the U.S. dollar and on some days exceeded its value by a few cents. That's a huge upward move -- a 61% gain -- for the Canadian currency, which was worth just 62 U.S. cents in 2002. (The Canadian dollar is called the loonie because, natch, it has a picture of a loon on it.)

That's a boon for Canadians who want to go on a shopping spree in the United States, but it's not such great news for the Canadian economy. Canada is on a pace, as of July, to export $550 billion in goods to the U.S. this year. That's about 50% more than China, our second-largest trading partner. And the number looms even larger when you remember the relatively small size of the Canadian economy: At $550 billion, exports to the United States were on track to make up about 40% of Canada's GDP in 2007. (Canada's economy measured $1.2 trillion at the end of 2006).

With the U.S. dollar falling against the Canadian dollar, everything that Canada exports to the United States becomes more expensive. That sends some U.S. customers scurrying to look for cheaper sources of supply, perhaps inside the United States. And it makes some customers shut their wallets completely.

Economic growth in Canada, which came in at 2.6% in 2006, was forecast to drop to 2.3% or 2.2% for 2007 when economists made their projections last December.

Forecasts now predict that the economy will slow even more to a 2% annual rate of growth in the third quarter of 2007. " jubaks journel.

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Higher prices for oil & gas should cushion the blow to an extent though...

It will for sure. But if manufacturing jobs and lumber jobs go and then there is a downturn in oil and gas prices, watch out!

You must also remember that the rising Canadian dollar is reducing the real Canadian dollar revenue earned through sales of oil and gas, because these prices are denominated in US dollars.

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yes, Canada will suffer greatly.

"Canada, our biggest trading partner, is letting its currency rise. The Canadian dollar, the loonie, has reached parity with the U.S. dollar and on some days exceeded its value by a few cents. That's a huge upward move -- a 61% gain -- for the Canadian currency, which was worth just 62 U.S. cents in 2002. (The Canadian dollar is called the loonie because, natch, it has a picture of a loon on it.)

That's a boon for Canadians who want to go on a shopping spree in the United States, but it's not such great news for the Canadian economy. Canada is on a pace, as of July, to export $550 billion in goods to the U.S. this year. That's about 50% more than China, our second-largest trading partner. And the number looms even larger when you remember the relatively small size of the Canadian economy: At $550 billion, exports to the United States were on track to make up about 40% of Canada's GDP in 2007. (Canada's economy measured $1.2 trillion at the end of 2006).

With the U.S. dollar falling against the Canadian dollar, everything that Canada exports to the United States becomes more expensive. That sends some U.S. customers scurrying to look for cheaper sources of supply, perhaps inside the United States. And it makes some customers shut their wallets completely.

Economic growth in Canada, which came in at 2.6% in 2006, was forecast to drop to 2.3% or 2.2% for 2007 when economists made their projections last December.

Forecasts now predict that the economy will slow even more to a 2% annual rate of growth in the third quarter of 2007. " jubaks journel.

Thanks for that. Canada tends to be a month later than the other major countries is publishing key economic reports. We won't know what Qtr 3 GDP was until December for example.

Actually Canada's level of exports to the US is almost on a par with China, which runs a very close second. Also, I think the level of Canada's exports to the US this year will be in the order of US$300B, not $500B. Exports to the US constitute around 25% of Canada's GDP, not 40%.

A few errors I have seen there in that jubaks article :-).

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Because it is leading to a shift in the world's wealth. If China is saving money and the US is borrowing money and the money that's borrowed by the US comes from China, then China will get wealthier and wealthier at America's expense. Nothing wrong with it as such, except China would appear to have the more superior strategy, don't you think?

Yeah , it really is the strangest thing, the U.S appears to be blithely walking into an obvious trap and will be overtaken by China within

a fairly short time. Is the U.S leadership so stupid? Do they have a 'cunning' plan? Maybe they believe that Jesus will appear and save them,

or that world leadership is their destiny?

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I suspect it falls into the category of "cunning plan".

As I see it, the main problem in the US economy is the trade deficit. The economy has been haemorrhaging cash for years. They can raise trade barriers and incur the wrath of the international trading community (not that this usually bothers them) or they can allow the dollar to tumble.

The US, probably more so than any other major economy, has the ability to be largely self sufficient. Take away the price advantage of imports and you've got the Americans buying their own TV's, cars, food etc.

Contrast this with the UK where we have to import practically everything and you see why we're screwed if or when sterling goes the same way.

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Yeah , it really is the strangest thing, the U.S appears to be blithely walking into an obvious trap and will be overtaken by China within

a fairly short time. Is the U.S leadership so stupid? Do they have a 'cunning' plan? Maybe they believe that Jesus will appear and save them,

or that world leadership is their destiny?

It kinda makes you laugh when you hear US politicians talking about imposing tariffs etc. on China. The US deficit has ballooned under this Administration, while the US dollar has tanked. I'm not sure that this was a cunning plan or just sheer incompetence, but Bush will certainly be handing over a head of warts to his successor.

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Because it is leading to a shift in the world's wealth. If China is saving money and the US is borrowing money and the money that's borrowed by the US comes from China, then China will get wealthier and wealthier at America's expense. Nothing wrong with it as such, except China would appear to have the more superior strategy, don't you think?

The outcome of this strategy depends on how things play out economically and politically in the debtor nation -- which is not always as planned.

China began to borrow in the world capital markets in the late 19th century, issuing bonds to pay for defense as well as for large-scale economic development. Particularly interesting is the role that the clash between domestic and international investors played in China’s 1911 revolution.

...

On October 19, 1921, the Chinese government declared bankruptcy, and with few exceptions, China began to default on her foreign loans in the 1920's.

China's strategy has been to impoverish her own people for the benefit of foreign consumers, in the hope of eventual enrichment. Has she ignored the lessons of her own revolutionary history in adopting this approach?

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The US, probably more so than any other major economy, has the ability to be largely self sufficient. Take away the price advantage of imports and you've got the Americans buying their own TV's, cars, food etc.

This is my take, too. Historically and culturally, the USA has strong isolationist instincts. They could easily pull down the shutters ... except that they need to import oil, so they can't avoid engaging with the world on some level (probably military! :o)

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I suspect it falls into the category of "cunning plan".

As I see it, the main problem in the US economy is the trade deficit. The economy has been haemorrhaging cash for years. They can raise trade barriers and incur the wrath of the international trading community (not that this usually bothers them) or they can allow the dollar to tumble.

The US, probably more so than any other major economy, has the ability to be largely self sufficient. Take away the price advantage of imports and you've got the Americans buying their own TV's, cars, food etc.

Contrast this with the UK where we have to import practically everything and you see why we're screwed if or when sterling goes the same way.

The ratio of US imports to exports right now is 60:40, so the US is predominantly import dependent as of now. Of course the biggest import is energy and the US is not self-sufficient in that, nor or is it likely to be, unless it takes over an oil-producing country. Hang on, maybe they did have a cunning plan after all.

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The outcome of this strategy depends on how things play out economically and politically in the debtor nation -- which is not always as planned.

China's strategy has been to impoverish her own people for the benefit of foreign consumers, in the hope of eventual enrichment. Has she ignored the lessons of her own revolutionary history in adopting this approach?

Very interesting! We would need to prove that this was a deliberate approach with a forseen outcome and not an approach that has proven to reap accidental rewards. I suspect she knew what she was doing though and read the outlook for the US economy brilliantly. Of course economies run in cycles, but being in there and catching the tail end of any one of these cycles was always going to deliver the perfect outcome for China.

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Because it is leading to a shift in the world's wealth. If China is saving money and the US is borrowing money and the money that's borrowed by the US comes from China, then China will get wealthier and wealthier at America's expense. Nothing wrong with it as such, except China would appear to have the more superior strategy, don't you think?

No. Since the Dollar is under the control of the US. The US can simply default on (selected) debt, and/or freeze Dollar accounts. This is why China will have a serious problem if they won't start buying gold big time anytime soon. They desperately need financial reserves that are under their own control. A partial default or accounts freeze by the US would of course still create a huge financial, economic and possibly military crisis.

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