Thursday, September 10, 2009 0 comments ++[ CLICK TO COMMENT ]++

US trade deficit starts expanding

The US trade deficit had been shrinking in the last few years but appears to be reversing trend and starting to expand again. The following chart from CalculatedRisk illustrates the trend:

The overall trade deficit is back to 2001 levels. It had declined significantly during the last two years. Notice how the trade defict excluding petroleum actually started shrinking back in early 2007. The big wild card is oil. If oil prices stay where they are now, or decline, the trade deficit will likely shrink. I believe the non-petroleum deficit may never go back to what it was in 2005.

The trade deficit is sort of a theoretical measure that is ignored by many investors but I feel is important in the long run. As Marc Faber has suggested, the US trade deficit provides liquidity (in US$ terms) to the world (i.e. it acts as cheap money and possibly depresses the value of the US$.) When it started shrinking last year, liquidity dried up.

A shrinking trade defict also means that someone on the other side of the trade will see the opposite effect. The country with the trade surplus will likely see some negative consequence due to their dwindling surplus.

If the deficit shrinks or stays small (say 1998 levels), it will likely exert a downward pressure on financial assets.


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