The usual suggestion to lower trade deficit is increase exports and lower imports and also depreciation of the currency.
Luciana Juvenal, Economist at St Louis Fed in this short research note says:
What other forces could drive the trade balance? As the chart shows, pronounced cycles and booms in asset prices have usually accompanied widening trade deficits. For example, U.S. equity prices rose by almost 340 percent between 1990 and 2000 before losing about one-third of their value in the first two years after the dot-com crash. Similarly, housing prices increased by around 130 percent between 1990 and 2007 with a marked increase from the early 2000s until 2007. Moreover, after the subprime crisis that began in the summer of 2007, sharply declining asset prices have brought about an improved trade balance.
What links exist between asset prices and the trade balance? Rising asset prices are presumably linked to trade deficits because they increase household wealth and spending, they can finance it by issuing equity. Conversely, weakening asset prices might be associated with lower spending, and hence, lower demand for imports.
Very interesting finding. I didn’t think of this channel before. So what are the suggestions?
In conclusion, a large U.S. dollar depreciation could be a key driver of the trade balance adjustment, but recent analysis has questioned its effectiveness. Given the strong links between equity and housing prices and the trade balance, moderating U.S. asset prices could serve as an alternative mechanism to sizably adjust the trade deficit.
Hmmm. Her detailed paper on these findings is here.
July 11, 2009 at 5:12 pm |
No doubt, a collapse in equity forces Americans to consume less, reducing imports. One could argue that the collapse in home values was actually caused by the trade deficit. The trade deficit has to be financed by a sell-off of American assets. With most high-value American assets already sold, the U.S. turned to selling mortgage-backed assets, creating a bubble that finally burst.
Contrary to what many believe, currency valuations will have little impact on the trade deficit. As an example, consider the Japanese yen, which appreciated in value vs. the dollar by over 300% in the last few decades. During that time, our trade deficit with Japan soared. More recently, the Chinese yuan has appreciated by over 20%. Yet, our trade deficit with China continues to rise.
At this point, I should stop and introduce myself. I am the author of a self-published book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” To make a long story short, my theory is that, as population density rises beyond some optimum level, per capita consumption of products begins to decline out of the need to conserve space. People who live in crowded conditions simply don’t have enough space to use and store many products. This declining per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.
This theory has huge ramifications for U.S. policy regarding population (especially immigration) and trade. The population implication may be obvious, buy why trade? It’s because when we engage in free trade in manufactured goods with nations that are much more densely populated than our own, we actually import this population density-driven effect on unemployment and poverty. We become one nation economically. The manufacturing work is spread evenly across the new, combined labor force. But, while the more densely populated nation gets free access to our healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption (if we get access to their market at all). The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide. No amount of productivity improvement or dollar devaluation can have any significant impact because none of these alter the fundamental problem – the disparity in population density and the disparity in our markets.
As a result, our enormous trade deficit persists. We have established a host-parasite relationship between the U.S. and these over-populated nations. It’s a virtual global trade welfare state. We finance it through a sell-off of American assets. What will happen when those assets are depleted? The prospects are scary. I believe that the current recession is just a precursor for what’s to come.
If you’re interested in learning more about this important new economic theory, I invite you to visit my web site at OpenWindowPublishingCo.com. There you can read the preface for free, join in my blog discussion and, of course, purchase the book if you like. (It’s also available at Amazon.com.)
Please forgive me for the somewhat “spammish” nature of the previous paragraph. You have an outstanding blog going here. Keep up your efforts to raise concern about our nation’s misguided economic policies!
Pete Murphy
Author, Five Short Blasts
October 9, 2009 at 11:39 pm |
I LOVE THIS ARTICLE!!!!!!!!!!!!!!!!!!!!!!!