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The Trade Deficit and Foreign Confidence in the U.S. Economy


If foreigners lose confidence in the U.S. economy and are less willing to hold dollar denominated assets, the supply of dollars in the global banking system will exceed demand and the exchange value of the dollar will fall...


A while back, in an article titled "Yawn!", John Succo took a look at the trade deficit and the lack of interest in foreign entities owning dollar denominated assets:

"Last month's current trade deficit was around $55 billion. This number represents the amount U.S. consumers purchased in goods from foreigners, exchanging dollars for "stuff." The $45.7 billion number above is the offset: foreigners receiving $55 billion in dollars must sell those dollars to someone outside the U.S. who does not repatriate those dollars back to the U.S. by purchasing U.S. securities with them.

The fact that they did not offset means that there was a short-fall of $4.3 billion: the U.S. was unable to borrow that amount to finance the trade deficit.

This number is very important to me. It is evidence that foreign entities, whether private individuals, corporations, or the central banks themselves, are tiring of owning dollar denominated assets.

This is still just as relevant today as it was two years ago. If foreigners lose confidence in the U.S. economy and are less willing to hold dollar denominated assets, the supply of dollars in the global banking system will exceed demand and the exchange value of the dollar will fall, leading to increased interest rates in an attempt to attract overseas investment.

Needless to say, higher interest rates never bode well for the U.S. economy. Thus, the trade deficit must be addressed.

Last week, U.S. Treasury Secretary Henry Paulson talked about how vital investment from abroad in the U.S. economy is, and that he was concerned that an impression is being created that foreign money is not welcome.

Henry Paulson

"Unfortunately, the fear of foreign investment may be resurfacing," he said.

(Paulson chairs the Committee on Foreign Investment in the United States, which is seen as unfriendly by some overseas investors, as representatives from twelve U.S. agencies-including the Defense Department, State Department, Commerce Department, and the Department of Homeland Security-review the national security implications of foreign acquisitions of U.S. companies or operations.)

"Foreign direct investment is an essential part of our domestic economy," Paulson said.
However, foreign direct investment peaked in 2000 and has been flat since.

As Succo pointed out, American companies were-and are-selling a lot of "stuff." This year, for the first time, Standard & Poor's expects the 500 companies in the S&P 500 to generate more than half of their sales in non-U.S. countries.

At the same time, thousands of American jobs are lost each week as U.S. companies move business overseas. The Economic Policy Institute says an average of 441,000 U.S. jobs are lost every year-more than the total employment numbers in greater Dayton, Ohio.



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