Dollar Continues to Crater as Trade Deficit Skyrockets
The weak U.S. dollar, which has been falling for months against major world currencies, should have made U.S. exports to other countries cheaper and foreign imports more expensive here, but today's numbers show that neither side of this desired effect of a cheap greenback has materialized in global purchasing patterns. This indicates that the dollar has yet to achieve a value low enough to stop or even slow down the exploding trade deficits, and this is leading to speculation that the dollar could soon drop to levels against the euro and the yen never before contemplated.
The Bush Administration, although publicly favoring a "strong dollar," has tacitly allowed the greenback to slide, much to the consternation of trading partners, who are concerned about the possibility of a flood of cheap U.S. imports into their countries. Today's report that U.S. exports dropped and foreign imports ballooned should ease those fears somewhat for the time being; but the plunge in U.S. exports to overseas markets should put the White House on notice that its plan to have export-related industries contribute to or possibly lead robust domestic economic growth in 2005 is just not coming to fruition.
The news about the record trade deficitas well as concerns about an up-coming auction of Treasury securities that is not expected to be received well by traditional lenders to the U.S. governmentsent bond prices down today, pushing yields on short-, intermediate-, and long-term bonds higher in their continuing trend upward to levels that will eventually nudge the U.S. economy into recession.
Stocks closed generally but modestly higher today, as investors took heart and relief in a favorable fourth quarter, 2004, earnings report from chip-making giant Intel. Caution is still the watch-word on Wall Street, though, as more fourth-quarter earnings reports are due out in the days ahead. Many investors remain concerned that, despite Intel's performance, other companies may report eroding earnings that would be the first signs of an economy losing what momentum it had achieved in the third quarter of 2004.
Both gold and oil continued to rise, today, each commodity in its own way signaling trouble ahead. With oil prices moving back into the wallet-busting territory they achieved several months ago, the consumer side of the domestic economy will end up using more and more of its disposable income to pay for gasoline and energy-related services, leaving less for purchases of other goods and services.
The continuing rise in the price of gold essentially reflects the erosion of the U.S. dollar against a metal standard, in the same way that the greenback is eroding in value against major world currencies. Perhaps more importantly, however, for the longer-term outlook, with metals rising in value against the dollar, the markets may be reflecting a mounting expectation of rising inflation rates that will be evident to consumers and businesses in the months ahead. The troubling prospect of rising inflation will prevent the Federal Reserve from providing any accommodative liquidity to the economy to prevent it from slipping into recession later this year. In other words, the Fed cannot print money, which would drive interest rates lower, when inflation may be starting to show up in earnest.
Inflation is caused by too much money having been printed, which the Federal Reserve Board's Open Market Committee has all but admitted it did during nearly all of the first four years of the Bush Administration.
The White House has offered no plan to pro-actively engage and mitigate the problems challenging the U.S. economy, instead pressing forward with a public relations campaign to sell its partial privatization of Social Security. That plan could require the government to borrow several trillion extra dollars. Such a never-before-seen mopping up of lendable funds available in the capital markets would drive domestic interest rates aggressively upward, virtually ensuring a long, deep, and debilitating recession.