Friday, February 15, 2008

Consequences of a Weak Dollar

WASHINGTON (Reuters) - U.S. import prices rose 1.7 percent in January, powered by higher prices for oil, while export prices increased 1.2 percent, the largest rise since January 1989, a U.S. government report showed on Friday.

All those people out there that believe we can devalue the dollar and close the trade deficit, here's the evidence of why that will never happen. Import prices are rising faster than export prices and we still import more than we export. Basic math tells me that closing the trade gap through a devalued dollar will be almost impossible. The volume rise in exports required to offset the rise in import prices is just too much to overcome. The only way to close the trade deficit is to reduce the volume of imports while maintaining (or increasing) the volume of exports. That won't happen through trade restrictions - what partner will allow us to restrict their exports to us while welcoming our exports to them?

The better question is why should we want a trade surplus? It seems such a simple thing; we should want to sell more stuff than we buy - but concentrating on the trade deficit as a measure of that is ridiculous. If we sell more stuff than we buy - as a country - that would imply that we are consuming less than we produce and are therefore saving and investing the difference. That's good. But does it matter whether we sell our stuff to foreigners or to our own citizens? I submit that it makes no difference whatsoever and therefore the trade deficit is meaningless. What matters much more when talking about deficits is the budget deficit of our government. That is real money that must be borrowed. A trade deficit in and of itself does not imply indebtedness.

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