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November 21, 2003
Mortgages have had a good run: early in the week 5.875%, briefly to 5.625% on Wednesday, then 5.75% yesterday and today.
New economic data did not change market perceptions. Housing is still screaming-strong, reflecting US population growth (about 300,000 people/month), not economic acceleration of the kind that would disturb the Fed; CPI was flat in October; and the trend for fewer unemployment claims continued.
The mid-week mortgage low coincided with new US-imposed restrictions on China's exports. This threat of protectionism caused panicked selling of the dollar in currency markets, though bonds benefited from buying by foreign central banks that were trying to keep their currencies from appreciating versus the dollar.
Other forces may be at work. Textiles were the object of the new restrictions on China, specifically to stop the expansion of China's exports of brassieres to the US, which tripled in 2003. It is possible that the dollar fell because of the threat to American civilization posed by a looming shortage of brassieres, a development the Baby Boomers considered progressive and pleasant in the 1960s, perhaps a mixed blessing for them today. A spokesman from China's Commerce Ministry (who evidently suffered a humorectomy at the hands of the Red Guards) decried the American policy as a breach of "discrimination and transparency", delivering his complaint a few hours before the annual Victoria's Secret show.
Oh, well... better play it safe, and just follow the money.
The US is running an immense trade deficit with the world, about 5% of our GDP. We can do so only so long as the world is prepared to loan us the money to buy their... stuff. Even if exporters are willing to lend, in order to promote sales to us -- like auto makers offering 0%, no payment loans -- financial markets tend to intercept both the exporters' willingness and the importer's profligacy.
Self-correction begins as the more the exporters sell, the stronger their currencies get, and the more expensive their products are in the importer's weakened and weakening currency. Sometimes the game plays out easily, as our deficit did in the 1980s. Sometimes the end-game is tough: the importer suffers rising inflation and interest rates, and the ensuing recession dampens import ardor.
Mr. Greenspan spoke on the trade deficit yesterday; a nice, reassuring speech, heavy on the self-correction probability. He suggested repeatedly that exporters' willingness to lend to us is based on productivity gains here, making the high returns on dollar-denominated assets a good trade for exported goods.
Could be. However, Mr. Greenspan did not address the artificial elements in the trade situation. First, the huge buying of Treasurys by exporter central banks in order to keep the value of their currencies down so their products remain cheap in dollar terms. Second, many exporters to the US have non-tariff barriers to our exports to them (Japan's non-tariff evasions are legendary), so that if/as the dollar weakens, our exports cannot expand enough to self-correct the balance.
When governments act to intercept self-correction, taking increasingly large and unsustainable measures to protect the status quo, then we have the stuff of which bubbles are made. Mr. Greenspan has not been good at bubbles.
The absolute worst government interception is overt protectionism: tariff barriers. In the name of protecting domestic jobs -- one of the worst political deceptions -- any nation inflicting punitive tariffs risks retaliation, and a spiral into trade war. The US is already playing with fire in its overt effort to encourage a slide in the dollar, and diplomacy has not been the greatest gift of the Bush administration.
For the moment, central bank buying of Treasurys is an interest-rate boon here, but a trade upset can just as easily slop things the other way.
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