As attested to by the large amount of coverage of the recent US-China Strategic and Economic Dialog [0] [1], [2], [3], [4],[5] China looms large in any discussion of the world economy. One of the most important contributors to the informed discussion on this subject was Brad Setser, at the Council on Foreign Affairs and before that at RGE Monitor. Unfortunately, Dr. Setser will be leaving the blogosphere, so his insights will be missed (although fortunately for us, he'll be adding his input at the NEC, where we all wish him well).

So now, there'll be even a greater need for reasoned analysis. One addition to the discussion is a Symposium on China's impact on the global economy just published in Pacific Economic Review (August 2009). From my introductory chapter to the symposium:

Over the past decade, China's presence

...

There's plenty of commentary on the ongoing China-US Strategic Economic Dialog, from the Economist [1], Reuters [2], [3], and Bloomberg [4] [5]. Here are three pictures to place some of the issues in perspective.

My first observation is while the nominal USD/CNY had stabilized in recent months, the exchange rate that matters most for global imbalances, the Chinese real trade weighted CNY, has moved around a bit, as the dollar has appreciated and depreciated.

Figure 1: Bilateral nominal USD/CNY exchange rate, period average (blue, left scale), log IMF trade weighted real effective CNY (red, right scale), and log BIS trade weighted real effective CNY (green, right scale). Bilateral exchange rate adjusted for swap center rates used before 1994; see Fernald, Edison, Loungani (JIMF, 1999) for details. Source: St. Louis Fed FREDII, IMF, BIS, and author's calculations.

I must confess that while I've thought

...

This post provides links to a number of interesting articles I have read over the past few days (while touring through Europe) that you may also enjoy.

• Gary Stix (Scientific American): The science of economic bubbles and busts, July 2009. The worst economic crisis since the Great Depression has prompted a reassessment of how financial markets work and how people make decisions about money.

• Matt Taibbi (Rolling Stone Magazine): The great American bubble machine, July 9-23, 2009. From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they’re about to do it again.

• Bill Gross (Pimco - Investment Outlook): “Bon” or “non” appétit?, July 2009. Investors who stuffed themselves on a constant diet of asset appreciation for the past quarter-century will now be

...

The IMF has released its estimates for 2009Q1 reserves (COFER data). Below I update and extend my recent post on the dollar as a reserve currency.

h Figure 1: US dollar (blue, right scale), US dollar plus 60% of unallocated reserves (green, right scale), and log nominal value of US dollar against major currencies (red, left scale). NBER defined recession dates shaded gray. Source: IMF, COFER, June 30, 2009, Federal Reserve via FREDII, NBER and author's calculations.

Notice that the USD share has not declined, despite a decline in the dollar's value against major currencies. Following Brad Setser's observation that the reason the demand for the dollar as a reserve currency rose is because total demand for reserves increased, I also plotted the levels -- rather than shares -- for the most recent data.

Figure 2: US dollar reserves (blue), ...

What if conventional wisdom about the Fed is wrong and it isn’t printing money like a drunken sailor? Well…that would make most of the media coverage of the bond market and the economy wildly off the mark.

As it turns out while media talking heads were ranting about how the Fed was running their printing presses overtime to push up money supply the facts were very different. M1 has actually declined since the middle of December, 2008. During the same six month period M2 has only risen by a little less than 3%.

For some reason that I can’t explain most financial, economic and media experts don’t bother to read the Federal Reserve’s weekly money supply data before writing authoritative articles or spouting off on TV about money supply and its implications.

Of course, M3 followers argue that M1 and M2 are bad money supply indicators because they are too narrow and

...

In my last post, I cited Jeff Frankel's keynote speech from a recent Bank of Canada-ECB workshop. He also pointed to the end of "Exorbitant Privilege" and "Dark Matter", and other arguments of American exceptionalism. I think we'll see resounding evidence of this in Friday's release of the US end-2008 Net International Investment Position (NIIP).

First, recall nearly two and a half years ago, I posted this figure...

Figure 1: Net International Investment Position, end-year (blue squares), and Cumulative Current Account balance on a NIPA basis (red line), as a ratio to GDP. NBER recession dates in gray shading. Sources: BEA International Investment Position release of June 2006, BEA NIPA release of October 2006, NBER, and author's calculations. Originally posted here

...and asked if "gravity can be defied?" At the time, I argued the answer was "no", and observed that NIIP reversion to

...

Recently I wrote that the forward calendar of to-be-issued government and mortgage related debt isn’t going to swamp the economy.

Since I wrote my article Paul Krugman wrote an article citing research done by Brad Setser that supports my thesis. Setser’s analysis predates my article and is really high quality work.

I am certain that Krugman didn’t have any idea what I wrote when he published his article but, just the same, Krugman’s subsequent writing is a helpful addendum to my “why not to worry about the debt tsunami” theme.

Basically, according to the analytical work done by Setser, the amount of public borrowing is being offset by a fall off in private borrowing. Less private borrowing is another way of saying that the savings rate has risen. Below is a graph from Setser’s article illustrating how the rise in government borrowing

...

Time to review trends in reserves, against the backdrop of financial crisis, recession, and dollar gyrations. (I'll try to be original, but Brad Setser has been more diligent than I in covering these issues over the past few months. [0] [1] [2])

A few observations:

Known dollar reserves as a share of world reserves appear to be falling. Total dollar reserves have likely not declined as precipitously. Even with the decline in the dollar share, it is probably not as low as it was during the early 1990's. The dollar share is (mechanically) linked to the dollar's value. Known dollar reserves at end-2008 are less than predicted by a historical correlation. But this differential is infinitesimal compared to the "unallocated" share of total reserves.

Consider first the IMF statistics on known dollar, euro (and euro legacy), and pound reserves.

Figure 1: US dollar (blue), euro (red), sum of Deutsche mark, French franc, ...

As Brad Setser points out today, it is difficult to find the alleged green shoots and second derivatives in today's release of Korea's trade data. True, exports in Korea did pick up in April but are now down in May on a monthly basis and on an annual basis they are down a staggering 28%. This picture is repeated in Taiwan (exports down 31% yoy) albeit with the significant difference that exports are up a bit from April thus corroborating the second derivative discourse. According to Setser, Korea is important since Korea's exports have been less affected by the global downturn than that of Japan and, as we shall see, Germany. Moreover, and much contrary to Germany and Japan Korea's trade surplus have actually improved due to the large drop in commodity prices which is really making itself felt in the annual figures since we are closing in on

...

My views on the short term prospects for GDP growth at home and abroad were little changed (relative to this post) by the information in the March trade release. Goods imports are collapsing, albeit at a slower but still substantial rate, and goods exports are declining, with high volatility.

First consider the growth rates of real goods imports ex.-oil and real goods exports.

Figure 1: Month-on-month annualized growth of real goods imports ex.-oil (bold red), and of real goods exports (bold blue); and year-on-year growth rates (respectively teal, purple); all in Ch.2000$, calculated as log differences. NBER defined recession dates shaded gray, assuming recession has not ended by May 2009. Source: BEA/Census, March trade release, NBER, and author's calculations.

Note that imports seem to be recovering. But it's important to look closely at the vertical axis; month-on-month annualized growth rate is minus 10.9%, and the year-on-year growth

...