Thursday, June 1, 2017

Government bond yields and trade

Most discussions of trade imbalances focus on the desirability of the goods that a country produces. Countries with trade surpluses are believed to be those that produce highly desirable goods.

However, trade imbalances are linked to capital flows. What if it is the demand for capital flows that drives the trade deficit, rather than the other way around? Capital flows from regions of surplus, where interest rates are low, to regions where interest rates are higher.  Government bond yields provide a measure of the demand for capital.

The chart below provides some evidence for this point of view. It shows that trade surplus countries tend to be countries where government bond yields are very low, indicating a surplus of capital.

The lowest bond yields are in Switzerland and Germany , while the highest are in Australia, Italy and the US.

Data note:  Government bond yields are for the 10 year bond on 5/31/2017. The data are from the Bloomberg or Trading Economics website.  The current account balance data is from the OECD stats website.

Wednesday, May 31, 2017

Home ownership and trade

There appears to be a negative correlation between the home ownership rate and the current account balance for advanced economies. Below is a chart showing the data.

Here is the same data plotted in a way that makes the correlation more obvious.

I have a couple of theories about why these two variables are linked.  Countries with high home ownership rates may have policies that make it easy to get mortgages and other forms of consumer credit. This leads to strong demand for savings which tend to drive capital inflows and associated trade deficits.

Another theory is that home ownership reduces the need for cash savings in bank accounts. People who own houses never have to pay rents and they don't have to worry about inflation in housing costs.  Less bank saving is offset by capital inflows and associated trade deficits.