Wednesday, February 1

The Trade Deficit Story

Frank Shostak at explains why the trade deficit is not a threat to the economy but the central bank is.
Our analysis doesn't imply that the US economy is in healthy shape - far from it. However, what we maintain is that the key factor behind the erosion of US fundamentals is not the widening in the trade account as such, but rather the policies of the Fed. During the reign of Alan Greenspan between August 1987 and December 2005, money AMS has increased by 173%. Greenspan's strong monetary pumping was accompanied by a massive artificial lowering of interest rates. The federal funds rate was lowered from 6.5% in 2000 to 1% in 2003. Obviously then such reckless policies must have severely undermined the process of real wealth formation. However, focusing on the trade account statements only diverts the focus of attention from the true culprit behind the erosion of US economic fundamentals.

The fear of a growing trade deficit is used to bully protectionist legislation through Congress, the threat of which could easily disrupt the economy and send the market into a freefall.

Then again, if you happened to be long puts, that would be a good thing.

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