Economics & Research Blog
Of Course the Trade Gap Narrowed... The Economy is Slow
Despite the strong two quarters of GDP readings,
By Dr. Joe Webb
Published: November 9, 2007
Despite the strong two quarters of GDP readings, the economy is definitely slowing, and today's trade data show it. But it's being reported otherwise, that the trade deficit narrowing is a good thing, and that American exports are surging because of the weak dollar. The weak dollar, is therefore, a good thing.
The trade data do not include services and foreign direct investment, so they can't be trusted, anyway. They may be indicative of general economic trends in a way most people do not realize, and that's when the deficit narrows it's a sign of economic weakness. The U.S. has a large surplus in service exports. How often is that reported in the papers?
One of the problems with the weaker dollar is that import prices rise, and we start importing inflation. Inflation will be getting worse, not better, in coming months. Import prices rose +1.8% last month, and the experts were expecting +1.3%.
Trade deficits or surpluses are for the most part meaningless. The U.S. economy ran big surpluses during the Great Depression, and they certainly did not help then. The problem is that the money supply is much to large in relation to other currencies, and investors overseas see other opportunities for investment. So there are two things occurring: a bloated money supply and competition for capital... supply is too big and demand is too small, and hence, the price of a dollar goes down.
While this is not ominous, these are definitely economic storm clouds that will be made worse if the Fed keeps pouring money into the system. Paul Volcker... where are you when we need you?