Currency Inflation and Trade Deficits.
Currency Inflation and Trade Deficits.
[I posted this message on February 18, 2010, 9:38pm, within a discussion of ” A remedy for USA's trade deficit of goods”, within the “Outsourcing, Globalization & Free Trade” board of the “Economic Populist Forum” group].
I’m impressed with the concept introduced by Unawflcombatnt within his topic entitled “Trade deficit: Inflation vs. $ Devaluation”. The conventionally accepted expectation is during U.S. dollar’s periods of inflation our trade deficit will decrease. Unawflcombatnt explained why the reverse has been occurring.
During historically more recent periods of USD inflation there was excessively increased commercial and consumer credit made available. Many loans were granted to less credit worthy borrowers and/or for less adequate collateral. (Recall ex-Fed chairman Greenspan’s phrase “unjustifiable optimism”).
During these periods of USD’s inflation our consumers’ perception of their own wealth increased their purchasing rate of all, (i.e. both imported and domestic) goods. USA’s rate of consumption exceeded our dollar’s rate of inflation. The rate of USA exports did increase but never faster and often much slower than USD’s rate of inflation. In the case of China that pegs their currency exchange rate to USD, their rates of imports increases are extremely little or nonexistent.
During these periods of USD’s inflation USA’s rates of importing goods did not keep abreast with USD’s inflation rate. In these periods (contrary to conventional expectations), USA’s trade deficit proportion relative to our GDP did not decrease and often increased. In such cases USA’s trade deficit has been additionally more detrimental to USA’s GDP.
Respectfully, Supposn
