Filed under: International markets, Products and services, Federal Reserve, Recession
It should probably come as tiny surprise that the U.S. trade deficit actually dropped last year, falling 9% from the record all time high set in 2006. I state it should come as no surprise, mainly because you would have to have been living in a cave the past year not to realize that the U.S. dollar has been in free-fall.
While no one likes to see the current shape of the American currency, the one good thing that comes from a weak dollar is that our exports become more attractive to the rest of the world. In 2006, America ran a trade deficit of a large $811.5 billion. That number shrank to $738.6 billion last year, and should drop even further in 2008 considering the current economic landscape.
So at least we’ve something to celebrate right? Well, before you go doing cartwheels over the drop in the deficit you should take a second to consider just what it means to run a deficit of $738.6 billion.
What it breaks down to, is that America is, on average, borrowing $2 billion every single day in order to finance its appetite for foreign goods. Definitely something to consider. Keeping that in mind, maybe it is starting to make sense why the dollar has reached the point where it is right now. Last year’s decline comes after five straight years of record setting deficits.
Of course I’m not suggesting that the only reason the dollar finds itself in the situation it is currently is the trade deficit. There are many other things working against the dollar right now. Big spending on two wars, falling housing market, and the coinciding credit crunch leap to mind. But for sure, the persistent trade deficit that America has been running is a massive contributor. After all, Americans do love those Japanese automobiles and TVs!
For now, foreign countries have continued to be willing to ship their goods to America in exchange for dollars, but concern is starting to spread that America is on thin ice at this point. The dollar has been in a constant free fall, and is still showing completely no signs of life. Should the situation around the dollar continue to erode, you have to wonder just how long foreign countries are going to be willing to accumulate the troubled currency.
Michael Fowlkes has worked as a stock trader for seven years and spent the last four years working as an analyst for the on the internet investment advisory service Investor’s Observer.
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