There's an interesting piece in the NY Times Magazine on the current account deficit, which leads nicely into today's announcement that the 2004 deficit, $666 billion (smirk), is the largest ever, up 25% over 2003, the previous record holder. Current account deficits are related to trade deficits, the difference in the amount of stuff (cars, oil, everything sold at WalMart) the US buys from the rest of the world (ROW) and the stuff ROW buys from the US. Trade deficits are normally financed by investment flows, eg. the large trade deficit with Japan due to their car makers taking over the US market starting in the 70's or so was financed by the Japanese buying up things like all the real estate in NYC, and later by building factories in the US (Honda, the largest US motorcycle manufacturer). In the 90's, it was the US stock market that was the favorite of the world, and the US appetite for foreign goods was nearly matched by foreigners appetite for US dot coms and telecoms. If not matched by investments, then a trade deficit turns into a current account deficit, where goods going into the US are paid for only with US dollars going the other way. Note that the ballooning of the current account deficit occurs right after the market crash. This is all right for awhile, as central banks like US dollars, because they've replaced gold as a storehouse of value for central reserves. However, there's a limit to how much reserve you need, particularly if you start to get nervous about how good a storehouse of value a currency is, given those trade and current account deficits. South Korea sparked a mild panic last month when they announced they were cutting dollar purchases by their central bank. (This is noted by the article too. It states, incorrectly, that the panic stopped when they denied the announcement. In fact, the clarification only stated that they were just slowing new purchases, not selling off their existing reserves. Yet! Still, it stopped the slide in trading.) The biggest and most complex situation, though, is China.

China maintains a fixed band of 8 renminbi to 1 USD, which is maintained, in light of the current account deficit, by massive USD purchases by the Chinese central bank. Why would they want cheap currency? Well, the Chinese economy is expanding at ~20% per year, developing very fast, mostly due to a fantastic export market driven by cheap currency. They still have an incrediblly large number of rural poor, however, so they have a long way to go, and want to keep this up for awhile. The only downsides for them are that US goods and services are too expensive for Chinese consumers (but they should be buying local, anyway!) and their central bank is filling up with soon-to-be-nearly-worthless American pesos. That's mostly an accounting issue, though, and the Chinese banking system is so screwed up that overaccumulation of US dollars could well be the least of their problems. Eventually, the relative currency values will renormalize, and Chinese stuff will no longer be cheap.

Japan did this too: the first imported Japanese cars were cheap junk. It's not that Japanese engineers are worse, but when you're competing on price, you engineer for cheap. Then they became good and cheap. Soon the currencies flopped, and now Japanese cars are good and expensive, with valued brand names.

I can already see the beginnings of this process at work in China. If you're making something cost-sensitive and transportable for the US market, you don't even think about making lots of it unless you can make it in China (or maybe India). As a consumer, I'm starting to become familiar with Chinese brands in areas I'm interested in. For lithium-ion batteries for vehicles, eg, Thundersky has a reputation for good value, though the capacities aren't quite as good as rated, and reliability is an issue. Valence, a US company, had a design win for the new liion Segway, but they'd better build a plant overseas if they want to compete in volume. For lithium polymer, perhaps the most promising technology, the name is Kokam, a Korean company. For complete electric scooters (the slow motorcycle kind), Peugeot has had a single model (powered by French Saft NiCad batteries) for awhile, but EVT in Taiwan is expanding their line, patenting their technology, and exporting all over the world. If you want a titanium frame road bike, there are ones more expensive than Habanero cycles, welded by Chinese aerospace engineers, but it's doubtful that they are any better.

Given this vision of the future, what should individuals do? Buy stock in Chinese companies? Unfortunately, protections for minority investors are quite weak in Asia as compared to the US (one of the reasons for the popularity of the US stock market), and in China, foreigners are not allowed even that. (There is a funny money "B" exchange just for foreigners, with even weaker protections.) Direct investment in China, even for professionals, is both difficult and risky. No, the only thing to do is buy Chinese made stuff.

ObEBike: Fresh snow == no go. I'm still impressed by the disconnect in reliability expectations and outcomes. Yesterday, I had a complete power failure on the ebike, 90% of the way to work. A car that only got you 90% of the way to work would be totally unacceptable, and require pushing/towing, repairs, hours out of your life, etc. After my previous car stalled in traffic twice, (it even restarted!) I had it junked for $50. Reliability is very important. On the bike, a total power systems failure resulting in being exactly 5 minutes late. I guess that's one advantage of a parallel hybrid -- redundancy.