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Economics & Research Blog

Trade Deficit Up, But Not Because We Imported More Goods

The New York Times reported that the trade deficit widened last month.

By Dr. Joe Webb
Published: January 11, 2008

The New York Times reported that the trade deficit widened last month. Here are some of the highlights of their report.
"Record oil prices widened the United States trade deficit in November as the cost of imported petroleum outpaced a modest rise in exports... The gap between what Americans import and export grew 9.3 percent, to $63.1 billion, the biggest deficit in 14 months, the Commerce Department said on Friday. Imported oil accounted for more than half of the total... Export sales rose again in November, by 0.4 percent, to a record $142.3 billion, but decelerated from October’s 0.9 percent rise."
They're not really record oil prices, but that's a story for another time. The Fed has increased the money supply, however, and all it has done is increase prices of imported goods. Since the use of energy is inelastic in the short-term, that is, demand does not quickly decrease when prices increase, and vice versa, all that has been done is to import inflation, not oil. Normally, an increasing trade deficit is a sign of increasing economic activity. Since the trade deficit does not include direct investment, that is non-US entities buying things like real estate or financial securities or businesses, the report is not all that critical and is not a danger sign to the economy. Already, foreign investors are are bailing out U.S. financial institutions as the dollars they have been holding are being repatriated to the U.S. in the form of investment.
But what was of interest was that there were expectations of a declining trade deficit because of a slowdown in business. This increase, however, has indicated that the Fed's actions have had their unintended consequence: inflating the prices of goods that are needed by consumers and industries. It makes no matter that the prices of U.S. exports are better when the risk of inflation will make business investments and consumer savings decrease in value.

Dr. Joe Webb is one of the graphic arts industry's best-known consultants, forecasters, and commentators. He is the director of WhatTheyThink's Economics and Research Center.



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