Thursday, April 24, 2008

An Economic Bright Spot, But...........

I'm fairly pessimistic about this year's economic prospects given our economy's dependence on the overstretched, debt-laden, house-poor, inflation-wracked consumer and a corporate sector beginning to curtail investment. However, there is one segment of GDP which should lend some support - net exports. The weakening of the U.S. dollar has helped make our goods more cost competitive globally, and that has recently begun to spur exports. For many of the multinational companies that have reported earnings so far this quarter, international growth has been one of, if not the only, bright spots in their reports.

I expect to hear more and more economists praising the weakening dollar and encouraging further devaluation in order to help spur the economy. This would be a disastrous policy to pursue given the number of dollars held abroad and our dependence on other countries (largely China and Japan) to fund our chronic deficits. No country has ever devalued itself to prosperity. We risk a run on the dollar if we're not careful.

Currently, the dollar still offers perceived safety in a volatile financial world, but foreign holders of our debt these days aren't earning much interest. What little interest they are earning is being wiped out by currency losses (the falling dollar). This state isn't likely to persist long-term. At some point, rational foreigners may begin demanding a higher interest rate on our debt to compensate for the purchasing power loss of a falling dollar. Hopefully, this can be forestalled until the economy is strong enough to withstand higher interest rates. If not, this recession could be much more severe and/or prolonged than widely expected.

The following article from yesterday's Wall Street Journal discusses the "high-class" problem of insufficient container supply:

In what may be the only obvious downside to the current U.S. export boom, domestic producers like Reed’s Inc. are finding it harder than ever to get their products onto outbound ships.

federal funds rateSurging foreign trade, fueled largely by the weaker dollar, is filling up ships faster than at any time in recent memory and created a backlog for companies like Reed’s, a Los Angeles-based maker of premium soft drinks, including cream soda and a spicy line of ginger beers.

“I’m working with a couple of companies that are saying May 21st is the earliest date they can get me a container, ANY container,” says Mark Reed, the company’s executive vice president of international sales. “But I need it now.”

The bottleneck is threatening to take the fizz out of Reed’s upcoming product launch in Europe. The company, which sells its premium drinks in natural food stores in the U.S., recently began to push overseas and was gearing up to begin selling in France. “So here I am, I’ve got product specifically labeled for Europe, but I can’t get it over there,” says Mr. Reed, who says this is likely to delay the product launch.

The problem first emerged last year and has been spreading, hindering exports of everything from manufactured goods to farm commodities and scrap metal. –Timothy Aeppel