high oil and high gdp, and additional comments

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Posted by warren mosler (65.113.90.26) on 16:43:05 11/15/07

I've been asked how oil be up so high and gdp remain strong. Simple answer:

As long as the $ paid to non residents for imports is spent by non
residents on exports there is no change in gdp.

Currently this seems to be what's happening. Our trade gap is in fact
falling which means the increased funds we are spending on imported
oil are being used to buy US source goods and services, and gdp
remains strong.

However, while gdp remains strong, our standard living is falling.
For a stylized example to make the point, we spend more for the same
amount of oil, and reduce the rest of our consumption, while non
residents take the extra oil revenue and buy more US goods and
services that we produce and no longer can afford to consume.
This is called a reduction in 'real terms of trade' by the textbooks.
We have to export more for the same volume of imports.

Regarding the liquidity crisis, so far the risk seems to be
sufficiently spread around such that no one institution of stature
seems on the verge of failing. GE is a good example, as it the state
of Florida.

Yes, funding pressure seems to be increasing, much like it did about
this time in 1998, if I recall correctly, when, after the same 75 bp
in cuts, and liquidity issues were at least as as bad, it was
announced DBank was buying BT and the entire crisis seemed to melt
away overnight funding immediately loosened up.

I'm presuming the FOMC for the most part still believes that any
financial meltdown is a lot less expensive in real terms than letting
inflation get out of hand and spending years reeling it in. Even if a
collapse costs 5% of gdp for example, they would believe cutting
sufficiently to avoid it and triggering elevated inflation
expectations would cost, perhaps, 10% of lost gdp or more over time to
keep it from accelerating and bring it back down. That's standard
mainstream economic thought, backed up by volumes of math models.

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Subject:	Re: high oil and high gdp, and additional comments
Comments:	: I've been asked how oil be up so high and gdp remain strong. Simple answer: : : As long as the $ paid to non residents for imports is spent by non : residents on exports there is no change in gdp. : : Currently this seems to be what's happening. Our trade gap is in fact : falling which means the increased funds we are spending on imported : oil are being used to buy US source goods and services, and gdp : remains strong. : : However, while gdp remains strong, our standard living is falling. : For a stylized example to make the point, we spend more for the same : amount of oil, and reduce the rest of our consumption, while non : residents take the extra oil revenue and buy more US goods and : services that we produce and no longer can afford to consume. : This is called a reduction in 'real terms of trade' by the textbooks. : We have to export more for the same volume of imports. : : Regarding the liquidity crisis, so far the risk seems to be : sufficiently spread around such that no one institution of stature : seems on the verge of failing. GE is a good example, as it the state : of Florida. : : Yes, funding pressure seems to be increasing, much like it did about : this time in 1998, if I recall correctly, when, after the same 75 bp : in cuts, and liquidity issues were at least as as bad, it was : announced DBank was buying BT and the entire crisis seemed to melt : away overnight funding immediately loosened up. : : I'm presuming the FOMC for the most part still believes that any : financial meltdown is a lot less expensive in real terms than letting : inflation get out of hand and spending years reeling it in. Even if a : collapse costs 5% of gdp for example, they would believe cutting : sufficiently to avoid it and triggering elevated inflation : expectations would cost, perhaps, 10% of lost gdp or more over time to : keep it from accelerating and bring it back down. That's standard : mainstream economic thought, backed up by volumes of math models. : :
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