Tuesday, June 15, 2004

What is a trade deficit?

The US trade deficit widened to a record $48.3bn in April, putting a bigger drag on economic growth than expected and further damping down hopes that the trade gap is soon set to narrow.

Economists said that with the dollar reviving in response to expectations of higher interest rates, there was little chance that the trade gap would start to close over the next 12 months.

The trade deficit is an illusion.

If Americans trade U.S. dollars for foreign goods what happens to those dollars? Either the recipient buries them in the ground which reduces the money supply and makes our money more valuable. Or they take those dollars and buy goods and services from America. The money we use to buy these things either has to be traded back in the United States for other goods or they were foolish to take U.S. dollars in the first place.

So the money has to make its way back here eventually and that will lead to Americans getting the money back for their services. If the money never returns then we've just traded paper for real goods. That's just the kind of deficit we can afford.

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