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 deficit—as 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. government—sent 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.
Published 1/13/2005 01:38:18 AM
<< 21 Comments Total
...who are concerned about the possibility of a flood of cheap U.S. imports into their countries.
Do you think the increased anti American sentiment that is out there from behavior in Iraq, etc. would noticeably slow this process compared to say, four years ago?
Good evening, Mr. Goat.
I have seen absolutely nothing in the mainstream press about this possibility, but I have been thinking the same thing, myself. Fortunately, my training in economics pulls me back from the edge of thinking that the world actually cares about how wretched the current Administration is.
Normally, consumers and businesses—regardless of country or culture—are coldly rational about economic matters: pretty much everyone, except for a few very dedicated souls and nations, acts on price and quality alone, without regard to underlying "moral" or "ethical" issues. How many progressives do you know who have stopped watching TV shows on Fox? How many liberals actually refuse to purchase products made by companies with anti-labor policies? How many conservative gentlemen really don't spend time and money prowling the Internet looking for every manner of debauchery imaginable?
That having been said, how could it be that U.S. exports, which are now priced overseas in dirt-cheap American dollars, aren't selling like hotcakes?
Fortunately, at least part of the answer does not require that we throw out the assumption of cold-blooded rationality. You see, the problem is that the U.S. dollar may be dirt cheap, now; but it isn't dirt cheap enough, yet, to be anywhere close to that "purchasing power parity" I explained in yesterday's headline article. Until the U.S. dollar gets a whole lot closer to PPP, U.S. goods and services overseas will still be overpriced in foreign markets, which means they still won't be purchased at anywhere near the levels that would turn the tide on the trade deficits we're suffering.
And the primary reason for that is because the U.S. government is still borrowing money by the truckloads. As long as the government needs to sell so much Treasury paper, which is a capital good, the global markets will keep U.S. dollars flowing out of the United States in the current account (imports exceeding exports), so that they can flow back here as purchases of those Treasury securities in the capital account.
Recall that this is that "accounting identity" to which I have previously referred: a negative current account must (by definition) be offset by a nearly equal and positive capital account.
Therefore, the United States simply cannot make any headway on the trade deficits until it stops needing to borrow so much money. That's why I've been predicting in both the headline articles and on the threads that the greenback will keep going down. I'm not saying anything speculative, at all: it's just how it has to work.
You should feel at least some degree of relief, Mr. Goat. People the world over are still just as rational as they always were. They buy what's cheap, regardless of whether or not the cheapest thing is the ethically best thing.
The same can be said, I would venture, for American politicians: the voters have bought the cheapest President they could find.
And just like most other cheapo-special stuff, this President comes without a warranty, an instruction manual, or a valid return address.
The Dark Wraith heads out the door to buy a snack at Wal-Mart.
Well, I'm going to disagree with you DW. And with me a considerable amount of Europeans would also disagree with you. In my day to day life if there is something I need to buy that is American but has another optional product coming from another country, even if it is more expensive (but not a lot, of course), I make the rational and the conscious option to not buy American. Some days, or weeks, ago a report came out saying this is what a lot of Europeans are doing, as a direct consequence of the opinion we have of the nowadays US, Bush and its Administration. I wouldn't be at all surprised if this tendency is spreading across the globe. We do care and some sort of antiAmericanism has come to stay. And I really think your President and his administration again lacked the vision or the conscience to realize this fact. No wonder their plan is not working and what I said may be a key factor preventing it from working. But even if Bush and friends had a conscience, do they really care?
And by the way, about this: "...virtually ensuring a long, deep, and debilitating recession.". So, this is going to be worse than expected, right?
Good morning, Joseph.
I truly am glad you have related this European thinking to us. As I noted, in the back of my mind has been this nagging suspicion that something like that is going on.
I still stand on the basic point, though, that the dollar has not reached purchasing power parity, which prevents U.S. goods from getting cheap enough to be really competitive. That having been said, there is nothing in economics that prevents consumer preferences from driving markets. In fact, that's good old American business wisdom: corporations don't create wants, they merely discover them.
I have always been a fan of the idea that people respond to economic incentives far better than they respond to moral imperatives. The dismissive, defiant attitude that was so prevalent among Americans in the early days of our nearly go-it-alone, pre-emptive attack on Iraq may yet give way to something a little more like reasoned behavior if the word ever gets out that, not only does a huge swath of the rest of the world not approve of our behavior, but more importantly, the rest of the world is going to punish us economically for years and years because of our defiance.
As I hinted above, however, the U.S. news media wouldn't dare tell Americans that we have lost our veil of moral credibility, and we have lost our economic leadership. That means there's not a chance that the news is going to report the worst part of all: we can't even get the rest of the world to buy our cheap junk.
Oh, well. Maybe it's just that we need a new marketing campaign. Yeah, that's it!
Boy, that was close: we almost had a moment of introspection about ourselves.
Whew.
The Dark Wraith awaits the new TV ads.
[Lessee, now, what would make Europeans forget about the past couple of years and start buying carloads full of American stuff? Geez, that's a tough one. Hey, does anyone know what those European types like?]
And just like most other cheapo-special stuff, this President comes without a warranty, an instruction manual, or a valid return address.
The Walmart president that was broken before the box was even opened...
The reason I asked my question was because I recalled recently reading/hearing the summary of a quarterly report on a US company that wasn't as rosey as expected. The report speculated that declining overseas sales were the result of exactly what Joseph described. I can't remember the company, so I don't have a basis for even speculating whether that might be true or not.
I do however, agree with both of you. In every country there are enough people that some will and some won't (in terms of avoiding US products) for whatever reason. The uncertainity is whether or not it would have an observable impact, and would that impact be great enough to affect the company in terms of producing goods in the US, etc. You know what they say; shit flows downhill.
I hate those partial page ads that are attached to the sunday comics. I don't buy based on ads anyway, but I absolutely refuse to shop at the advertiser that buys those. Does it make a difference? To me it does, but not enough that I have quit buying the paper.
Hello again DW,
about what I said I tried to find the news report that I have talked about. I'm sure I saw it but I don't really know where or if it was online. I remember that people were also talking, besides politics, not only about prices but also about quality and I remember that one example was given refering to cars. Around here I haven't seen yet great differences in prices in products, but maybe if the American products do become "that" cheap maybe we will buy them... however you will already have competition from the Chinese who, at least here in Portugal, have stores blooming like mushrooms with loads and loads of products very, very cheap (and I really mean CHEAP). Of course if you get to that level the quality of your products will be very questioned...
Besides all that I have another thing to tell you, one that maybe you won't believe... For years I am a collector of comics, manga and some DVD's. This stuff I mainly get from the US, of course (so you can't blaim me for not aiding in some way your economy). Like me there are a lot of people that buys that kind of stuff, it's a field that also has been blooming. In the store, here in Portugal, where I buy part of this kind of stuff they had real problems getting the products because some American companies don't want to export (and make more money in the process)... nuts, isn't it? And I don't know if this type of scenario has got more examples in other fields.
It sounds nuts, but there might be a sensible reason somewhere (maybe). They may have decided that the projected sales volume for such business doesn't (for them) justify the expense of acquiring the import/export services to export them to Portugal - or they may just be lazy shlubs too interested in dealing with Americans to want to bother with doing business outside the country.
I can easily imagine both scenarios.
- oddjob
Good morning, once again, Joseph.
I am somewhat familiar with companies that do not want to get involved in the business of exporting their products to overseas markets. When I was an independent business consultant, I had to learn how to help companies go through the process of being able to sell outside the United States. I can tell you right now that the process is daunting; and for a small company, it is overwhelming in terms of both direct and indirect costs.
As I became somewhat proficient at setting a company up to do exporting, I was able to see the whole thing as a process. Certain elements were always the pretty much the same, regardless of the company or the product; some things, on the other hand, were really different from one project to the next. It became quite obvious to me that, unless all of the organizations with which a given company interacts know what they're doing, the process will not go forward.
For example, a small company might want to start selling its products in, say, England. If the insurance agency that has been providing that company's property and casualty insurance doesn't have many clients involved in exporting goods to England, then that insurance company isn't even going to know, or possibly even have access to, the right insurance markets to get good quotes.
In terms of legal matters, as long as a company is doing business with the United States, it can rely for the vast majority of its contractual structures upon the "Uniform Commercial Code"; but as soon as a company steps outside of the U.S., all bets are off, and each contract must be exhaustively explicit in all kinds of ways that are entirely unnecessary in intrastate and interstate commerce. Worse, it was my experience that smaller companies usually rely on legal counsel that is not expert in international trade; so either that counsel must get up to speed on something he or she might not really want to get up to speed on, or the company must retain outside counsel that is very expensive.
On the banking side, the whole matter of letters of credit is a mystery to most normal business people, and you would be surprised at how many bankers are not ready to just start tossing LCs around as soon as a company needs them, especially when it's for the very first time.
Now, let's talk about actually finding places to sell a product in another country. That's a real pain in the backside, particularly for a company whose executives haven't much of a clue as to how distribution channels work in Europe or Asia. (They are strikingly different in many ways from those in the U.S.) Also, I ran into several companies that had ended up being suckered by con artists who promised "one-stop export expertise": these bad guys said they'd take care of everything from "dock to shop," but all they really took care of was lifting a pile of money from the wallets of corporations that didn't have that kind of money to waste.
And here, I haven't even gotten into the absolute labyrinth of laws, regulations, agencies, middlemen, pay-offs and bribes, and assorted other ins-and-outs of doing business in other countries. I swear to the Lord Almighty, it got to the point that, when an executive of one of my client corporations started talking about "potential markets overseas," I would get such a sick feeling because two things were usually clearly evident: first, this is going to be an awful lot like work, and the consultant (me) who's always a sucker for a challenge is going to be the one to try to accomplish this; and second, that executive with the hare-brained idea is looking to overseas markets because not enough people are buying the company's products here in the United States.
I don't do consulting anymore. I became good enough at it to know that it's WAY too much like work when you're good at it.
The Dark Wraith now runs a blog, instead.
Well, I don't know if this enlightens you, OddJob and DW, more on the subject but I know all the expenses were going to be paid by the store and the products were already sold, that is: people order them on advance, and the store mainly orders what the costumers want. Of course there could be the problem: amount of trouble to send the products/amount of products, but I think the volume of products ordered by costumers was quite high justifying the amount of trouble. I can get better informed on this matter one of these days, but I think this problem affected quite a lot of European countries and they solved it by sub-ordering, somehow...
By the way, I just remembered something: if you go to the US Amazon site you can find quite a huge amount of products that don't get sent outside the USA. I imagine that for some there is a valid reason, but for others I really can't get it. And that's too bad because some would be of interest. But on this subject I don't know if a lot can be said because the UK Amazon also has products that are also only delivered in the UK space, but those are few compared with the other site.
Good evening, Joseph and all of you other news hounds. Forgive me for this, but CNN.com this afternoon put up an article entitled "U.S. powerless to dollar's plunge?", which discusses the likelihood that the dollar will continue to drop against major world currencies (and you will note that I do not say "... other major world currencies," too often, anymore).
Now, just for the record, CNN is today—with a dateline of 5:16 p.m. on 1/13/05—publishing as hot news what is on record as having been stated for days, if not weeks, here on The Dark Wraith Forums. I suppose that if CNN's penchant for breaking stories in a timely manner continues, we might soon hear something on the news service about those new-fangled things called "personal computers."
I just thought I should let you all know that CNN.com is out there delivering all the news that's fit to print... just a little later in the year than the the good blogs are doing it.
But then again, who takes those blogs seriously, anyway?
The Dark Wraith honks his own blog horn.
[Darn it! I need a new blog horn; this thing sounds like one of those little squeeeka-squeeeka horns on a kid's tricycle.]
Well DW, what I found funny is how they managed in the end of the article, when the worse was coming to the top, to twist it and "sugar coat" it... the salvation is really at the end of the year (2 against the one who says the dollar may slide for 3 years). And you are in so very good hands: the Chinese and Japanese are all so very good friends of yours... Well, at least there seems to be a glimpse of reality coming through... if the trend continues who knows what other news may come to light! Perhaps the mist will dissipate?
Good evening, Joseph.
The mist will dissipate from the mainstream media's eyes, the cobwebs will fall from their brains, and the sun will pierce the very bowels in which their heads find both solace and residence, but all in due time.
This, I believe, because I have it on good authority that there was a point when even Nero was overheard to say, "Does anyone else smell smoke around here?"
The Dark Wraith prepares the marshmellows for the campfire.
I'm laughing because just a few moments ago I was telling on the MSN that Bush somehow makes me think about Nero, the Emperor that ended up making a camp fire of his capital, Rome...
The difference being that Nero, who was without a doubt responsible for the Roman conflagration, managed to blame the disaster on the nascent Christian sect, and so began an official policy of persecution that would last until the time of Constantine (who, by the way, happened to make his alliance with Christian warlords who were viciously anti-Semitic).
This time, Mr. Bush and his fellow empire builders will somehow manage to blame the American conflagration on a vast, Left-wing conspiracy of the secular humanists, the evolutionists, the liberals, the abortionists, the homosexuals, the feminists, the socialists, the Democrats, the unionists, the Muslims, and anyone else who might take exception to the ways and means of the radical Right.
With so many people who are going to be blamed by the neo-conservatives for this mess they've created, no one can ever accuse this Administration of not doing its part to be inclusive.
The Dark Wraith lies low to avoid being on the guest list.
Hey, you have an excellent blog here! I'm definitely going to bookmark you!
I have a site related to your topic of gas in price us as well. It has a few gas in price us articles now. I'll be adding more soon.
Come and check it out if you get time :-)
Great site. I am very interested in ge consumer credit and have also tried to set up an informative site about ge consumer credit please feel free to check it out and make any suggestions.
Hey, you have a great blog here! I'm definitely going to bookmark you!
I have a generally accepted accounting principle site/blog. It pretty much covers ##KEYWORD## related stuff.
Come and check it out if you get time :-)
If you're a fan of LOST, check out the new tv series lost
I thought your blog visitors would like to see this currency foreign system trading website:
currency foreign system trading
hello, your blog is interesting to read, I have a currency trading website, it is informative and provides many currency charts and real time currency quote. It should be helpful to your trading.