As a previous poster stated, its the deficit that matters. The US is a massive econ, and a consumption society. A trade deficit is to be expected, and no, this will not hurt the dollar. Ignore your econ 101. It is in the interest of China, Japan, and even Europe to keep the dollar strong as their econs are DEPENDENT on exports. Only if they move away from this will they stop buying up massive amounts of dollars. If (when?) the system collapses, it will be nastier than anything seen in historyy on a monetary scale, but this is a long time off. Stop worrying and trade!
with the recent developments, specifically china who isn't technically floating the RMB but not trying it to the dolla, and the japaneese who have gotten out of their gigantic debt and seem to be on the road towards postive growth. Isn't it logical to assume that the dollar will be devalued? I know you said that they will invest in the dollar, and I know they known for their investments in bonds, but are they as dependent on exports, as the dollar is depenedent on imports?
Huh? The dollar is not dependent on imports. Depends on many things. relative growth rates. interest rates, etc. But bottom line, if the dollar goes south in a big way, CYA China, and any other country dependent on US buying. And contrary to what Southamerica says, it doesn't matter if they trade with lots of countries, cause guess who these other countries also rely on? Ignore most fundamentals other than interest rate differentials. look at your charts.
"Without a depreciation of the dollar that forces up interest rates and inflation, then the equity market is not sensitive to changes in the monthly trade balances," Took this quote from a recent Yahoo finance article, can anyone put this into context for me?
The trade deficit is an obsolete way of measuring international trade. With a globalized world the numbers are almost meaningless. As an example, AMD chips are built outside the US (Taiwan) shipped to China to be integrated into motherboards and then build into notebooks in japan and shipped (imported) into the US. Of the total system cost, AMD makes the largets source of the of the profit to be made in the laptop (it has the largest investment in Intellectual Property). Yet AMD, a US company chooses for tax reasons or financial reasons to keep the AMD$$$ of shore, so the entire cost of the notebook is added to our trade deficit, and the profit piece is not returned to the US to "balance" the trade. The way the trade deficit is balanced is through American IP and non tracked services and the strength of its currency. As the worlds reserve currency the demand to hold money in greenbacks is what gives the USA its low interest rates.. (Despite what the fed thinks). It is the fed auctions that dictate the real interest rates. Long answer. Short answer:"Is it ok to run a trade deficit ? Ans: In economics all transaction must balance out and there is no real deficit. The way the numbers are current measured and reported is the same as they were measured before WWII. So no the numbers don't matter.
It seems to me that as long as America remains the final market for the bulk of products manufactured in the country with whom we have the deficit it is neutral. It seems as though these countries wind up holding dollars for fear of depreciating their own currencies. This essentially forces them to maintain the status quo where the US is the locomotive of the International Economy. Virtually guaranteeing us a certain advantage vis a vis standard of living. Combine this with "Inthe long run we are dead." and my take would have to be that it is a good thing. Thoughts?
A sustainable trade deficit is AWESOME. Every other nation would kill for it, and have tried. They make real products in sweatshop with thin profit margins, we print dollars without breaking a sweat. Then we exchange. What a deal!!! They collect the dollars and throw into dollar denominated assets, mainly treasuries. Which pays them back more dollars (ideally). So now they have more dollars and they can throw it back into more fun dollar denominated assets like all that cute derivative stuff. But hey, there is a bonus for them. We have lots of ppl willing to manage those dollars for them and create new investments, and properly route their dollars to the NEW & IMPROVED dollar denominated investment. But what happens if they stop accepting our dollars? No problem, we can replace oil with them by burning it for energy. IT'S A WIN WIN!!! (This is the part where the CNBC crew runs into the room, cheers and throws confetti all over the place. But then Maria stupidly shouts "Dow 12,000" and I have to bitchslap her.)