Jan 22, 2005


Brad Setser wraps up a piece on the global imbalances with this:

One last point. If Norfield is right ($$) and dollar reserve accumulation is only $130 billion, in 2005, there is no way the US will be able to fund a current account deficit of $800 billion -- yet barring some big improvement in the monthly trade balance, that's what we are looking at -- and it could be worse. $130 billion in financing from the world's central banks would be a HUGE change. I have no idea how Norfield came up with that estimate: it may reflect the world's central banks wishes, but it seems inconsistent with the United States' need for cheap funding.
Both Brad's piece (make sure to read the comments) and the FT article ($$) he links to are well worth reading. Many people have turned bullish on the dollar here and while most are only calling for a bounce that bounce is facing a very strong headwind (think pennies in front of a bulldozer). U.S. interest rates and bond spreads also seem like amazingly bad bets given the fallout that may occur in interest rates. While these arguments have been made for several years it is probably the wrong time to trade against them. The fundementals are still in place and while frustation with them might cause shorts to stop playing that does little to make the long side attractive. FNM is an excellent example of this.

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