Of Dollars and Sense

The news is out and it’s big. In January, the U.S. trade deficit was a new record $68.5 billion. What does this number mean? It means in January Americans imported $68.5 billion more in goods than they exported. At the current rate, the 2006 U.S. deficit will hit $800 billion.

Having a trade deficit, especially one this large, causes several problems. First, Americans are clearly showing that they continue to increase their purchase of imported goods–not the best news for American manufactures trying to sell domestically. Second, because we pay for our foreign goods in U.S. dollars, foreigners are accumulated a tremendous amount of American dollars.

And that brings us right to the third problem–with foreigners accumulating so many of our dollars, they are turning around and buying American Treasuries to finance the ever-growing U.S. federal deficit. And foreigners will demand higher interest rates from the U.S. in order for our Treasuries to be attractive to them.

As the months pass and the U.S. trade deficit widens, calls come for government action. I’ve heard and read all kinds of ideas to deal with our trade problem–from stronger enforcement of trade laws to surcharges on imported manufactured goods.

Economically, this is a big issue. In a democratic society, a citizen should be entitled to purchase choices. If those choices results in consumers buying foreign goods because they are cheaper than the same or similar domestic goods, that’s perfect competition at its best–and consumer freedom of choice. Hence, the dollars make sense, but that’s about all that makes sense.

If we continue on this unprecedented “every new month is a new record trade deficit month” path, with all the dollars foreigners are accumulating and reinvesting in our Treasuries, the foreigners could soon own us. One thing is for sure, we are becoming increasingly dependent on foreigners to finance our federal deficit. Where this will all end up no one really knows. The only solution I really see is collapsing the U.S. dollar. Yes, it will cause a slew of other economic problems, but they could be minor compared to the benefits in the U.S.: A declining trade deficit, more domestic manufacturing jobs, a higher stock market and “buying American” again.