avocadia: Intermediate imports and CAD graph:

A definition of Intermediate input . I am extrapolating to assume an intermediate import is such an input that has been imported. I further assume that the difference between that and a consumption import is that the latter isn\'t used to produce anything.

I see a brief period in the early 70s where the current account deficit was a misnomer, but after that it\'s downhill, gently at first and then somewhat precipitously. I guess the big dump post-2001 is the result of oil prices going through the roof, but I\'m not an economist either and my lack of economist mojo makes me wonder why the CAD crashed after 2001 when exports and import graphs didn\'t also crash or jump respectively.

cam: After 2001: Cheap credit? Interest rates stuck low after the dot.com crash. In the United States it was a period of super-cheap money. IIRC the cheapest money had been since WWII. Australia had higher interest rates than the US, but still they were low by Australian standards.

cam

avocadia: Cheap money: Somebody was saying, it may even have been John Quiggin and I have a suspicious feeling it was in the Fin, that there has been a glut of cheap money globally.

adam: Cheap US money: Firstly I Am Also Not An Economist.

2001-2006 saw a huge recovery in the AUD-USD exchange rate (particularly 2004). This meant suddenly cheap imports as Australians discovered the Pacific peso was worth something again. The underlying reason for the shift was presumably the interest rate differential between Australia, with one of the highest rich world cash rates, and the US, which was holding its rates down near zero. Same goes for other big trading partners such as Japan (0 interest rates) and China (pegged to the USD).

I think the CAD looks so volatile because, like profits, it\'s the small difference between two large numbers. Over the 40 year period Cam has presented, the Australian economy itself has had significant growth, so its easier to get spikes.  As for the late spike, I suspect we were selling lots of dirt, but importing more (in dollar terms) back in the form of toasters, stationery, hard disks, Belgian beer, and so on.

As far as the Pitchford thesis goes (so that\'s what it\'s called, ohh) I\'m pretty much on board. The current account deficit can be a bit meaningless in the context of a floating currency.  I give a Japanese company money, they give me a car - where\'s the deficit?

avocadia: The deficit: Isn\'t it that the money you gave the car maker can produce 1.x cars, where x > 0. In effect, x% of a car is leaving the universe of discourse and not being returned in the form of, for example, y% of a chunk of coal - so far as the statisticians can determine at any rate.

cam: The argument with the Pitchford Thesis: and I think I have seen Ross Gittens argue it too, is that foreign lenders see Australia as a good bet, not only to get their money back, but also the interest too. Since Au\'s deficit is consumer/private driven (rather than government burden like in the US), it is the market in action.

But it also runs up against the common-sense point of view of honest finance. The average person\'s experiences are that you make sure money coming is greater than money flowing out. Kitchen table economics. So seeing a highly volatile graph like that, with chronic outflows, runs counter to common-sense perception.

I was looking through some Austrade graphs of the in/out flows from the states. Was interesting. I will have to post those graphs.

cam

adam: How wide is the Universe of Discourse: ... in this context? Are we talking about the Australian economy or the world economy? Is the CAD supposed to be money lost to Australia or wealth destroyed overall?

This sounds like the Pitchford antithesis ...

avocadia: Universe width: I assume the universe here is the Australian economy, however the compilers of the data define that. So imports and exports are measuring goods being brought into and leaving the Australian economy. Or maybe it is the deltas of value being exchanged.