Friday, August 11, 2006

Trade Gap Narrows: Good News and Bad News

Yin and yang

The $64.8 billion trade deficit for June 2006 was enough below the the $65 billion deficit for May that people are talking about it as some soothsaying for the state of our economy...why not? One of the first things you do when you start to 'think economically ' is what does a change in a trend mean. There are always winners and losers to every change. As long as the overall trend-line is positive everyone wins in the longrun.

Ok, a decrease in the increase of the trade deficit means that other people who live elsewhere besides the US are buying more stuff from us than we from them (and why does this really matter anyway in our completely interconnected economy where stuff is sourced and assembled worldwide, national governments and borders just get in the way of this process). This means that 1) other economies may be growing at a faster relative speed than the US economy, 2) that the foreigner's currency is growing in value compared to the US dollar, and 3) than foreigners may be finding the US a less attractive place to invest than before eg in the past a growing trade imbalance meant an increasing amount of investment in the US, which is also a signal that people might be thinking the US economy is slowing down.

The point is is that its good we are selling more, and bad that people are investing less. Workers thinks that if we could show a trendline decrease in US government spending that the dollar could stay stronger (allow us to buy cheaper things) in that the government would be taking less of them, the US economy could grow quicker (as our money would go toward investment and saving instead of government programs), and the US would become a more attractive place to invest from abroad. Win-Win-Win.

** Additional remarks (thanks to Steve H. Hanke paraphrasing von Mises): When the interest rate is held too low (due to fed policy), people are unwilling to foregoe consumption by saving (not enough interest is paid on savings). Additionally, the low rate of interest means that there will be too many marginal investment projects (and too much debt then created). This creates an ever-enlarging gap between savings and investment. Economy-wide the difference between savings and investment is funded by foreigners (this is the difference between exports and imports). In 2000 the saving-investment gap was -4.0% of GNP in 2005 it was -6.25% of GNP.